KANSAS COMMENT, 1996

Subsection (1). This is the critical section which sets forth the rules as to where the financing statement should be filed. For goods, this is determined by the primary use of the collateral by the debtor. For intangibles and reified intangibles, it is determined by the nature of the collateral. In 1983 the Kansas legislature chose a nonuniform provision which places most business filings with the secretary of state's office. Financing statements for consumer goods, timber, minerals and fixtures are to be filed locally. The 1995 Official Text provides three filing alternatives for subsection (1), none of which were chosen. See also the Kansas Comment to 84-9-411.

In a nutshell, the rules are as follows: (1) If the collateral is consumer goods, file with the register of deeds where the consumer resides. If the debtor is not a resident of Kansas, then file with the register of deeds where the collateral is physically located. See 84-9-109(1) for the definition of consumer goods.

(2) If the collateral is realty-related, such as timber to be cut, minerals (particularly oil and gas), accounts from the sale of minerals at the wellhead or minehead (84-9-103(5)), or fixtures, file with the register of deeds where a mortgage on the real estate would be recorded.

(3) In other cases—as with accounts receivable, inventory, farm products, growing crops and equipment owned by a farmer or a business—file with the Kansas Secretary of State in Topeka.

(4) If the collateral has a significant connection with more than one state, such as mobile harvesting equipment, check the special filing rules found in 84-9-103.

(5) If titled motor vehicles are involved (including mobile homes), a financing statement is not appropriate; instead, the creditor's lien must be noted on the certificate of title, as provided in K.S.A. 8-135 and 84-9-302(3)(b). Note, however, that motor vehicle inventory of a dealer remains subject to the requirement of filing a financing statement with the secretary of state.

(6) If the property is subject to a federal statute which provides for national registration or filing, as with respect to general aviation aircraft under 49 U.S.C. § 1403, then the federal statute must be followed. See 84-9-302(3)(a).

This section must be read closely with the definitions of goods in 84-9-109, which defines goods by the primary use to which the debtor puts the goods. For example, a television set used by a doctor in the office would constitute "equipment" for which a financing statement should be filed with the Kansas Secretary of State. The same television set used at home by the doctor would be "consumer goods" for which local filing would be required. Courts applying Kansas law have done most of their grappling with the distinction between livestock as "inventory" and livestock as "farm products," but since the amendments in 1983 under which all such filings are made in the secretary of state's office, they should be filed in the same place. In Security Nat'l Bank v. Belleville Livestock Commission, Inc., 619 F.2d 840 (10 th Cir. 1979), local filing as to cattle was upheld on the ground that the debtor was feeding the cattle for his own account and was not a cattle trader; thus the cattle constituted "farm products" rather than "inventory" for which central filing would be required. Conversely, in Garden City Production Credit Association v. International Cattle Systems, 32 U.C.C. Rep. 1207 (D. Kan. 1981) the secured lender felt that the debtor's cattle (located in a feedlot) were "farm products." The court held that the cattle were not "in the possession of a debtor . . . engaged in farming operations" under 84-9-109(3) and thus constituted inventory. The point of these cases today is that the precise categorization of collateral is a tricky business, especially where it determines the type of collateral or the proper place to file. A smart creditor will always make an extra filing when in doubt; it is cheap insurance.

Subsection (2). If the creditor makes no filing at all, the security interest is unperfected as against all third parties. But if the creditor makes a good faith filing, albeit in the wrong place (e.g., with the register of deeds rather than the secretary of state where the collateral is farm products), the improper filing will be effective against those purchasers and creditors who have actual knowledge of the contents of the financing statement. Subsection (2), which follows the 1995 Official Text version, may give the secured party a second life.

The most difficult issue is the meaning of the phrase "knowledge of the contents of such financing statement." If the lender files centrally when he should have filed locally, and if a competing creditor or potential purchaser discovers the filing in a search of the central records, the improper central filing is clearly "effective" to protect against the claim of the third party. In Community National Bank v. Moyer, 17 K.A.2d 218, 836 P.2d 1198 (1992), Home State Bank had a perfected security interest in the debtor's equipment, including an after-acquired property clause. It had filed a financing statement in September, 1986. In 1989 Community National Bank entered into a purchase money security agreement to enable the debtor to buy a used planter. It filed its financing statement on May 12, however it filed locally, and not with the secretary of state. A credit bulletin alerted Home State of the filing on May 15, and a further information on the financing statement was obtained from an officer of Community National. When the debtor defaulted, Home State got a judgment for the debt and foreclosing its security interest, and sold the collateral. The court held the misfiling was effective under subsection (2), and Community National was entitled to the proceeds. Homestate knew of the contents of the financing statement so it was effective. It did not matter that Homestate was perfected through the operation of its after-acquired property clause before it learned of the security interest.

84-9-401(2) will not protect a misfiled secured party under the Bankruptcy Code. The debtor's trustee in bankruptcy could not be infected by actual knowledge of an improperly filed financing statement, in spite of this subsection. Under the strong arm clause of the Bankruptcy Code (11 U.S.C. § 544(a)), the trustee is a "hypothetical" lien creditor without knowledge.

Subsections (3) and (4). Subsection (3) does not vary from the 1995 Official Text. Kansas did not adopt the alternative provision, which would have required action by the secured party. The subsection covers the issues of the effect of in-state moves, and provides that a proper filing remains effective, in spite of a change of the debtor's residence, the debtor's place of business, the location of the collateral or the debtor's use of the collateral. For example, if a doctor borrows $4,000 to buy a stereo system for her office and some months later moves the system to her home, the original correct central filing covering "equipment" would continue effective even though the stereo system had since become "consumer goods" for which local filing would have been required in the first place. This rule will cause some "secret" liens, so later lenders need to investigate the history of the debtor and the collateral.

This subsection covers moves made within Kansas. If the collateral is taken out of the state altogether, a new filing may well be necessary within four months under 84-9-103, which governs multistate transactions, as indicated in subsection (4).

Subsection (5). This subsection, which provides for central filing to cover the assets of "transmitting utilities," was added to Article 9 with the 1972 Official Text.

Subsection (6). This subsection was added by the 1972 Official Text. "Organizations" include any legal or commercial entity, as defined in 84-1-201(28).

Revisor's Note:

Former section 84-9-401 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Floor Plan Financing," Charles H. Oldfather, 14 K.L.R. 571, 572, 576 (1966).

Filing of financing statement where collateral is farm crops, Van Smith, 35 J.B.A.K. 299, 337 (1966).

Subsection (1) (6) discussed in "Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437 (1968).

Requirements of filing, sufficiency of description and notice discussed in "Survey of Kansas Law: Secured Transactions," Gerald D. Haag, 21 K.L.R. 107, 109, 110 (1972).

Mineral lease exemptions from UCC coverage for security purposes, Bryan E. Nelson, 23 K.L.R. 367, 371 (1975).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 176 (1975).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 223, 224 (1976).

Tenth Circuit Survey on Contracts, U.C.C. and U.C.C.C., Martin R. Ufford, 15 W.L.J. 541, 550, 551, 552 (1976).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 304 (1979).

"Farmers and the Law: A Survey of Agricultural Exemptions and Exceptions in State and Federal Law," J. W. Looney, 50 J.K.B.A. 7, 17 (1981).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 361, 363, 366, 368, 369 (1984).

"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, 74, 75, 89 (1986).

"Congress Takes Exception to the Farm Products Exception of the UCC: Retroactivity and Preemption," Drew L. Kershen and J. Thomas Hardin, 36 K.L.R. 1, 29, 52 (1987).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 794 (2003).

Attorney General's Opinions:

Mortgage registration; instruments subject thereto. 86-137.

CASE ANNOTATIONS

1. Filing of financial statement pursuant to Kansaslaw binding under bankruptcy proceedings. In re McCoy, 330 F. Supp. 533, 535.

2. Chief place of business of purchasers of truck tractor used in interstate commerce was Kansas; lien required to be perfected hereunder; security interest unprotected. In re Dobbins, 371 F. Supp. 141, 146.

3. Subsection (1) applied in determining dairy equipment installed in barn was equipment, not fixture. Peoples State Bank of Cherryvale v. Clayton, 2 Kan. App. 2d 438, 439, 580 P.2d 1375.

4. Financing statement covering cattle held to be "farm products" under K.S.A. 84-9-109(3) properly filed with register of deeds. Security Natl. Bank v. Belleville Livestock, 619 F.2d 840, 850.

5. Creditor with security interest in inventory had security interest in non-cash proceeds by filing and perfecting. In Re SMS, Inc., 15 B.R. 496, 499 (1981).

6. Assignment of payments from realty deed governed by Article 9 of UCC; trustee had priority over unperfected bank. In Re Southworth, 22 B.R. 376, 377, 379 (1982).

7. Right to receive payments under a contract for deed is a "general intangible"; must be perfected by filing with secretary of state. In re Southern, 32 B.R. 761, 762, 765 (1983).

8. Where priority of federal tax lien is question, state UCC not applicable. Adkisson v. Fallier, 565 F. Supp. 850, 855 (1983).

9. 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).

10. 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).

11. Patent and trademark office filing system as preempting UCC with respect to patent assignments examined. In re Otto Fabric, Inc., 55 B.R. 654, 656 (1985).

12. Cited; action for failing to disclose existence of prior security interest, statute of limitations examined. Borg Warner Acceptance Corp. v. Kansas Secretary of State, 240 Kan. 598, 599, 731 P.2d 301 (1987).

13. Cited; superiority of partnership charging order (K.S.A. 56-328) over assignment constituting prior unperfected security interest examined. City of Arkansas City v. Anderson, 242 Kan. 875, 885, 752 P.2d 673 (1988).

14. Land description in financing statement 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).

15. 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).

16. Creditor must file financing statement to perfect security interest in annuity contract. In re Vinzant, 108 B.R. 752, 757 (1989).

17. Good faith misfiling exception applies regardless when prior perfected security interest acquired knowledge of improperly perfected purchase money security interest. Community Nat'l Bank v. Moyer, 17 Kan. App. 2d 218, 221, 836 P.2d 1198 (1992).

18. Security interest in conservation reserve program payments not perfected by filing with county; pre-1984 law controlling. In re Zweygardt, 149 B.R. 673, 674, 677 (1992).

19. Creditor filing under federal food security act (7 U.S.C. 1631(e)(1)) has priority over (K.S.A. 84-9-307) farm products exception. First Nat'l Bank & Tr. v. Miami Co. Co-op Ass'n, 257 Kan. 989, 991, 897 P.2d 144 (1995).

20. Bankruptcy trustee's attempted avoidance of lien on modular home denied; court distinguishes modular homes from mobile homes. In re Brouillette, 389 B.R. 214, 221 (2008).