KANSAS COMMENT, 1996

This is a new nonuniform amendment adopted by the legislature in 1991. Four other states have adopted similar statutes: Texas, Wyoming, New Mexico and Oklahoma. See Terry I. Cross, "Oil and Gas Products Lien Acts — Statutory Purchase Money Security Interests For Producers and Royalty Owners," 22d Annual Oil, Gas & Mineral Law Institute, March 22, 1996. The section declares the contract between the first purchaser of mineral interests is a security agreement, giving the interest owner a security interest in any oil or gas production (defined terms that include a wide variety of mineral interests) and in the proceeds to secure the purchase price and all taxes that should be withheld or paid. The security interest is automatically perfected, and recorded writing serves as the financing statement.

Subsection 1. This subsection declares the signed writing or any other voluntary communication to the interest owner or government agency recognizing the interest owner's right to payment for minerals to be purchased operates as a security agreement for the payment of the purchase price. The security interest runs in favor of the interest owners for the payment of the purchase price by the first purchasers. The "first purchaser" is defined in 84-9-319(16)(c) as the first person that purchases oil and gas from and operator or an operator which collects proceeds from sales for the benefit of the other owners. Paragraph (a) of 84-9-319(16) defines oil and gas very broadly to include oil, natural gas, hydorcarbons, sulfur, helium, their by-products or any combination thereof produced from the ground anywhere in the state of Kansas. The "interest owner" is the person who has a right to payment for "oil and gas production." Paragraph (b).

Subsection 2. The security interest created by 84-9-319(1) is automatically perfected, whether or not there is any recorded evidence of the interest owner's right to the mineral interests. If the interest owner's right to the minerals is evidenced by evidence in a deed or any other recorded real estate record, that recorded document serves as financing statement, but there is no separate filing fee and the requirement in 84-9-403 to file a continuation statement every five years does not apply.

Subsection 3. The security interest covers "oil and gas" production and proceeds from the production. Under 84-9-319(3)(a) the security interest continues for an unlimited time as to the production, raw, refined, manufactured or products of any of the foregoing. It also continues in proceeds as accounts, chattel paper, instruments, documents and "cash proceeds" ("money, checks, deposit accounts and the like") as defined in 84-9-306.

Paragraph (b) provides the security interest in all other proceeds continues as specified in 84-9-306, although it is difficult to imagine there being other proceeds in the ordinary course.

Subsection 4. The subsection creates a lien for taxes which were the responsibility of the first purchaser and a lien for payments which should be made to the interest owner if there is no security agreement under the terms of 84-9-319(1) because there is no signed writing, voluntary communication or possession.

Subsection 5. This subsection essentially treats the perfected security interest of the interest owner in much the same manner as the other provisions of Article 9 treat a perfected security interest in inventory. The security interest has priority over bona fide purchasers who take possession without notice, as described in 84-9-301, but the security interest is cut off by buyers in the ordinary course of the first purchaser-seller's business. Although the subsection cites 84-9-307(a), there is no such provision and it is probable that 84-9-307(1) was intended. After a sale in the ordinary course the security interest attaches to the proceeds. The buyer in the ordinary course of the seller's business must also meet the requirements of 84-1-201(9), which are incorporated into 84-9-307(1).

Subsection 6. Paragraph (a) generally gives the automatically perfected security interest purchase money status under 84-9-312, but it does not explicitly mention which subsection. It does mention that the 84-9-312(3) requirement of notice (to other secured parties of record) is not required. The issue regarding which purchase money priority the interest owner has is important because the priority of proceeds claims vary dramatically between 84-9-312(3), which deals with inventory, and 84-9-312(4), which deals with purchase money security interests in all other collateral. The purchase money security interest in inventory has priority only in the cash proceeds received on or before delivery of the inventory to the buyer, which will restrict the proceeds claim of the interest owner's proceeds claim against the first purchaser's other perfected secured creditors.

Treating the interest owner's perfected security interest in proceeds as similar to a purchase money inventory financier appears consistent with provisions in (b) which subordinate the statutory liens of subsection (4) to other Article 9 perfected secured parties.

Paragraph (b) apparently subordinates the statutory liens created by subsection (4) to all Article 9 perfected security interests, but gives it priority over unperfected Article 9 secured parties, bulk purchasers and buyers not in the ordinary course of business, lien creditors and, presumptively, the trustee in bankruptcy.

Subsection 7. Automatically perfected security interests evidenced by a recorded deed or writing have priority over those not evidenced by a recorded interest, and within the class of security interests evidenced by a recorded interest, the priority created by real estate law for interests in oil and gas in place, that is before production. Perfected security interests evidenced by a recorded writing have priority over automatically perfected security interests not evidenced by a recorded writing, and both have priority over the liens created by 84-9-319(4). Liens for the payment of the purchase price under that subsection have priority over liens for the payment or withholding of taxes.

Subsections 8, 9 and 10. These are miscellaneous provisions. Subsection (8) exempts these security interests and liens from the mechanic's liens mentioned in 84-9-310, but subordinates them to liens held by pipelines which are good in bankruptcy or against the federal tax lien. Subsection (9) applies the rules of 84-9-315 to commingled production subject to several liens. Subsection (10) validates the security interests and liens against the debtor even if assigned by the interest owner, and provides that recording the assignment will have the same affect as filing an amended financing statement, namely that the assignee will be treated as the secured party of record.

Subsection 11. The interest owner is still subject to the right of an operator to set off or use the funds in satisfaction of a debt of the interest holder. Where there is a dispute between an operator and other interest holders, the first purchaser may make payment to the person(s) they agree on, or to the one who proves entitlement thereto, or into court, which will have the effect of a tender of the funds under subsection 12, which will discharge the security interest.

Subsection 12. The first purchaser can terminate the security interest or the lien by making payment, or making and keeping open a tender of the amount believed to be due to the operator, which will cause the operator to be treated as the first purchaser. The payment or tender can also be made to a person designated, or acquiesced to, by the interest owner. Finally the payments or tender may be to the court if there is litigation or bankruptcy.

Subsection 13. This provision attempts to indicate the ways that a remote purchaser can protect itself from the automatically perfected security interests. With the exception of the example given in (a) of buying in the ordinary course from the first purchaser and making sure the first purchaser pays the owner (perhaps by issuing a jointly payable check), all require determining who the interest owner is, which could present major practical problems if the interests have been commingled. Remote purchasers, even buying in the ordinary course of the debtor's business, face the same difficulties buyers do under 84-9-307(1) if the security interest was not created by the seller. If it was not created by the seller, but by a remote prior owner, the remote purchasers take subject to it. Perhaps the only practical solution for remote buyers is to deal with persons who are financially healthy so that the right of recourse is a viable remedy.

Revisor's Note:

Former section 84-9-319 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.