KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, has not been amended since 1972.

Subsection (1). The subsection gives the secured party the rights provided under Part 5 (84-9-501 through 84-9-507) and, except as limited by subsection (3), those provided in the security agreement. Thus, the creditor and debtor are given great latitude and need to take care in defining "default" in the security agreement. Default is not a defined term in the Uniform Commercial Code, so without definition "default" would include only failure to pay. Other events, such as failure to insure the collateral, refusal to allow inspection of the collateral, failure to pay taxes or insurance, moving or selling the collateral without permission, death or insolvency of the debtor, failure of the debtor to make payments to other creditors, or whenever the secured party "deems itself insecure" should be considered for the security agreement. See 84-1-208. The only limit on the "insecurity" clause is the creditor's subjective "good faith." A common practice is to state the business conditions upon which the loan is conditioned as warranties, and provide that any breach of those conditions is a default. Moreover, the typical security agreement (as well as the accompanying promissory note) may contain an "acceleration clause" which provides that upon the happening of an event of default the entire unpaid balance becomes due and owing. See 84-1-208 and 84-3-108(1)(b). See Jensen v. State Bank of Allison, 518 F.2d 1 (8 th Cir. 1975) for an example of an insecurity/acceleration clause in action. Although Article 9 is the primary source of law governing default by a commercial or agricultural debtor, special protections are given to consumer debtors under the Kansas Uniform Consumer Credit Code. In case of conflict between the two statutes, the UCCC controls. See 84-9-203(4). In particular, K.S.A. 16a-5-109 provides an objective definition of "default" in secured transactions where the credit is used for personal, family or household purposes. (See K.S.A. 16a-1-301(10), (11), (12) and (13) for the scope of the Kansas UCCC.) The test under the UCCC is whether the consumer has failed to make a required payment or whether "the prospect of payment, performance, or realization of collateral is significantly impaired." Moreover, the burden is on the creditor to prove "significant impairment." As a practical matter, this means that broad insecurity and acceleration clauses, while still available for commercial or agricultural transactions, are limited where consumer transactions are involved. However, there is nothing in this subsection or the Kansas UCCC which prohibits creditors from attempting to define "significant impairment" in the security agreement itself. In fact, this subsection invites such a delineation.

Under the second and last sentences of this subsection, as well as subsection (2), the rights and remedies of the secured party are cumulative. Although the subsection indicates that the creditor could move against the collateral, obtain a personal judgment against the debtor, pursue any surety, or seek to enforce the obligation through any other means, in any order, and it is clear that the drafters intended great flexibility and an elimination of any election of remedies approach, there are currently two limitations under Kansas law to the general rule of cumulative remedies. First, a Kansas bankruptcy decision, In re Wilson, 390 F. Supp. 1121 (D. Kan. 1975), holds that failure of a secured lender to seek judicial enforcement of an Article 9 security interest at the time it obtained a personal judgment against the debtor constituted an impermissible attempt to split a cause of action. Therefore, the lender was not allowed to seek judicial foreclosure on its secured claim when the debtor later filed bankruptcy. This is consistent with precode case, Kearny v. Nunn, 156 K. 563, 134 P.2d 635 (1943), which held an action to foreclose the lien barred a latter action on the note. A later Tenth Circuit decision, In re Hill, 648 F.2d 1282 (10 th Cir. 1981) (applying Colorado law), appears to reject the reasoning in Wilson. It would appear that Kansas is in a very small minority holding that the judicial actions must be brought together. See White & Summers Practitioner Treatise at § 34-4.

The second possible limitation is the doctrine of equitable marshalling, under which a senior lien claimant must resort first to assets not subject to a junior lien so as to avoid inequity. The Kansas courts have in the past approved this doctrine as a limit on the senior secured creditor (see, e.g., Rundquist v. O'Leary, 184 K. 496, 337 P.2d 1017 (1959)), and both 84-1-103 and Official Comment 3 to 84-9-311 suggest that it could be incorporated into Article 9 transactions.

Subsection (2). This subsection, which is simply a cross reference to the rest of part 5 and 84-9-207, is the source of most of the litigation on repossession or foreclosure, and only those rights specified in 84-9-501(3) may be waived. Since the debtor has normally lost both the money and the collateral after default, it is important the secured party pay particular attention to the required notices and the rules regarding disposition of the collateral.

Subsection (3). This subsection is intended to prevent the secured party from overreaching in the security agreement. The debtor's rights as set forth in Part 5 of Article 9 (as well as the Kansas UCCC) are given as a matter of public policy; they cannot be waived in the original documents. Note that the list of non-waivable items does not include repossession free from breach of the peace, as provided in 84-9-503. This omission should be treated as either a legislative oversight or a recognition that it would be stating the obvious to provide that a debtor cannot agree in the security agreement to a bashing down of the debtor's home door or to burglary to get the piano following default. Although the debtor's rights cannot be waived in the security agreement, the agreement "may determine the standards by which the fulfillment of these rights and duties is to be measured if such standards are not manifestly unreasonable." For example, the security agreement could provide a reasonable time and conditions under which foreclosure sale would take place, thus filling out the broad "commercially reasonable" requirement of 84-9-504. Moreover, 84-9-504 and 84-9-505 contain special language which allows the debtor to waive certain foreclosure rights after default, even though this cannot be done in the original security agreement.

Subsection (4). This subsection is an application of the cumulative remedies doctrine set forth in subsection (1). It allows proceedings against the personal property, if the agreement covers both real estate and personalty. Alternatively, the secured party may proceed against both the real and the personal property under the applicable real estate security law. Prior Kansas law was probably in accord. See Liberty Savings & Loan Ass'n v. Jones, 143 K. 422, 54 P.2d 937 (1936), where a note was secured by both real estate and chattel mortgages, and the court held that the foreclosure was one cause of action; the trial court's order to sell the real estate first was held valid. In Mfg. Co. v. Lewis, 30 K. 541, 1 P. 812 (1883), the court said that the mortgagee could foreclose on the chattels and later foreclose on the land.

Subsection (5). Subsection (5) makes clear that any judgment lien which the secured party acquires against the collateral is in effect a continuation of the original perfected security interest; the lien relates back to the date of perfection of the security interest. In other words, if the secured party chooses not to enforce the security interest under Article 9, but pursuant to a judgment, the trustee cannot treat the creditor as unsecured with respect to the collateral or treat it as a preference. However, seizure of other assets not covered by a prior perfected security interest could be upset by the trustee under § 547 of the Bankruptcy Code (11 U.S.C. § 547).

The second sentence of this subsection provides that a judicial sale is a foreclosure of a security interest to which the requirements of Part 5 do not apply. Pre-UCC Kansas case law was in accord, holding that the chattel mortgage foreclosure sale is a judicial sale under the supervision of the court, and no compliance with the notice requirements of former K.S.A. 58-308 was necessary. Liberty Savings & Loan Ass'n v. Jones, 143 K. 422, 54 P.2d 937 (1936). See also K.S.A. 60-1006, which establishes a procedure by which the Article 9 secured creditor may foreclose and obtain a judgment in replevin and a deficiency judgment in personam against the debtor.

Revisor's Note:

Former section 84-9-501 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

The supreme court of Kansas has recognized that the code leaves the parties free to contract concerning their rights on default, J. Eugene Balloun, 16 K.L.R. 437, 441 (1968).

Paragraph (1) mentioned in discussion of impact of the Uniform Consumer Credit Code upon Kansas, Barkley Clark, 18 K.L.R. 277, 291 (1970).

U.C.C. remedies upon default of security agreement discussed in "Survey of Kansas Law: Secured Transactions," Gerald D. Haag, 21 K.L.R. 107, 113, 114 (1972).

Changes in repossession law under the UCCC discussed in "The New Kansas Consumer Legislation," Barkley Clark, 42 J.B.A.K. 147, 197 (1973).

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

Creditor's remedies under U.C.C., 25 K.L.R. 150 (1976).

Warranty violations in tripartite finance lease agreements, Winton A. Winter, Jr., 25 K.L.R. 573, 583 (1977).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 303 (1979).

"Survey of Kansas Law: Property," 29 K.L.R. 555 (1981).

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

"Commercial Law—Commercially Unreasonable Foreclosure Sales in the Context of a Surety Relationship—United States v. Lattauzio," John S. Clifford, 34 K.L.R. 175, 182, 183, 187 (1985).

"Is the Agricultural Security Interest Legally Healthy?" David A. Lander, 34 K.L.R. 505, 508, 512 (1986).

"Equipment Leases Under Article 9 of the Uniform Commercial Code," Charles D. Lee, 57 J.K.B.A. No. 1, 27, 30 (1988).

"Creditor Beware: From Default Through Deficiency Judgment," Wanda M. Temm, 60 J.K.B.A. No. 8, 17, 19 (1991).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 832, 833 (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).

"The Untapped Potential of the Kansas Consumer Protection Act," Amy Fellows, 74 J.K.B.A. No. 4, 24 (2005).

Attorney General's Opinions:

Record of mortgage can be filed as a financing statement covering fixtures with the register of deeds in the county where the collateral is located if such record complies with the fixture filing requirements without using a UCC-1 form. 2009-19.

CASE ANNOTATIONS

1. In a garnishment proceeding involving priorities between creditors as to funds in hands of clerk, the prior judgment creditor entitled to funds in dispute. Rural Gas, Inc. v. Shepek, 205 Kan. 397, 400, 469 P.2d 341.

2. Subsection (5) construed; judgment creditor precluded by principles of res judicata from bringing subsequent action to enforce security agreement. In re Wilson, 390 F. Supp. 1121.

3. 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.

4. Mentioned in holding lien waived for failure to file lien statement and surrendering possession of race car. Weatherhead v. Boettcher, 3 Kan. App. 2d 261, 262, 594 P.2d 257.

5. Cited in showing legislative intent to impose absolute and non-delegable duties on one party to contract. State v. Mwaura, 4 Kan. App. 2d 738, 741, 610 P.2d 662.

6. Rights and remedies of secured party upon debtor's default are cumulative. Clark Jewelers v. Satterthwaite, 8 Kan. App. 2d 569, 572, 662 P.2d 1301 (1983).

7. 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).

8. Where UCCC silent, courts may look to UCC decisions in determining commercially reasonable dispositions. Medling v. Wecoe Credit Union, 234 Kan. 852, 863, 678 P.2d 1115 (1984).

9. 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).

10. Creditor cannot pursue remedies herein when secured status not attained under K.S.A. 84-9-203(1)(a). Farmers State Bank v. Haflich, 10 Kan. App. 2d 333, 338, 699 P.2d 553 (1985).

11. Securing loan does not deprive bank of remedy available to unsecured creditor bank. Karner v. Willis, 10 Kan. App. 2d 432, 435, 700 P.2d 582 (1985).

12. Debtor's notes not merged in judgment in defendant secured creditor's favor to bar action against subsequent secured creditor for conversion. Bank of Oklahoma v. Fidelity State Bank & Trust Co., 623 F. Supp. 479, 484 (1985).

13. Cited; provisions dealing with secured party's interest in proceeds prevailing over default provisions after debtor files bankruptcy examined. Maxl Sales Co. v. Critiques, Inc., 796 F.2d 1293, 1296, 1297, 62 B.R. [168] [171] [172] (1986).

14. Ban's lien on tools on repossessed tools as possessory or nonpossessory security interest examined. In re Sanders, 61 B.R. 381, 384 (1986).

15. Defense of commercial reasonableness cannot be waived; impairment of collateral rule applicable between guarantor and secured party with collateral. U.S. v. Hunter, 652 F. Supp. 774, 778 (1987).

16. Cited; bank's right to possess collateral under security agreement as shielding it from liability for wrongful execution on original note examined. Wellsville Bank v. Sutterby, 12 Kan. App. 2d 585, 591, 752 P.2d 700 (1988).

17. Cited; whether security agreement may be altered by course of dealing (K.S.A. 84-1-205) examined. Riley State Bank v. Spillman, 242 Kan. 696, 699, 750 P.2d 1024 (1988).

18. Provision prohibiting debtor from waiving defense of commercially unreasonable sale of collateral construed to inure to benefit of guarantor. U.S. v. Kelley, 890 F.2d 220 (1989).

19. Creditor claiming security interest in airplane for parts properly perfected interest precluding financing statement filing. In re Arcentral, Inc., 289 B.R. 170, 172 (2003).

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).

21. Secured creditor's failure to foreclose on its security interest would not operate as waiver of its future right to realize on its collateral. In re Kuhn, 408 B.R. 528 (2009).

22. A financing statement must use the identical name as on the debtor's driver's license unless the official safe search harbor is satisfied. In re Prestion, 612 B.R. 770, 774 (Bkrtcy. D. Kan. 2019).