KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text and has not been amended since 1975.

Subsection (1). Subsection (1) allows the secured party to notify account debtors to make payments on accounts, instruments and chattel paper directly to the secured party after the debtor's default. Generally, notice to the debtor of the assignment is necessary to charge him with the duty to pay the assignee (State Investment Co. v. Cimarron Insurance Co., 183 K. 190, 326 P.2d 299 (1958)), and this subsection codifies that rule.

If the original assignment of accounts receivable was on a "notification" basis, the assignee would be expected to make direct collections from the account debtors even before default; the same would be true when accounts are factored outright or when chattel paper is sold from a dealer to a bank or finance company. But if the assignment is on a "non-notification" basis, as with the typical security interest in accounts, the secured party does not notify the account debtors to make payment direct to it until default of the assignor. Once direct collection is triggered, the secured party can "take control" of the proceeds, and credit checks to the unpaid balance of the assignor's debt.

This collection remedy has been upheld against attack as an unconstitutional taking of property without due process of law. Bichel Optical Laboratories, Inc. v. Marquette Nat'l Bank, 487 F.2d 906 (8 th Cir. 1973). The Bichel court held that there was insufficient "state action" to trigger the Fourteenth Amendment. In spite of the subsection's constitutionality, however, collection from third-party obligors can be stymied insofar as the assignee's rights are subject to (1) all claims and defenses arising out of the assigned obligation, and (2) all rights of setoff arising out of unrelated transactions between assignor and account debtors, to the extent that setoff accrues before the account debtors receive notification of the assignment. See 84-9-318 and Kansas Comment 1996 to that section. Thus, although the collection of accounts and other third-party monetary obligations is facilitated by the liquidity of the collateral, it is "precarious security" if claims or defenses exist.

Subsection (2). The secured party can also get into trouble by failing to diligently collect from account debtors, which is required by this subsection. If the duty to collect in a "commercially reasonable manner" is not met, the assignor can recover "any loss" caused by the assignee's breach. See 84-9-507 (1). The effect of careless collection could be the loss of recourse against the assignor. See Delay First Nat'l Bank & Trust Co. v. Jacobson Appliance Co., 243 N.W.2d 745 (Neb. 1976). What is "commercially reasonable" will depend upon the circumstances, but the secured party should be able to hire a collection agency and to compromise or settle disputed accounts, especially if the security agreement so provides. Nor should the secured party have to pursue account debtors to judgment on receivables or instruments, even though the expenses of collection could be added to the unpaid balance of the debt under this subsection.

The leading Kansas decision construing this subsection is Pedi Bares, Inc. v. First Nat'l Bank, 223 K. 477, 575 P.2d 507 (1978), which was a tort action for intentional interference with economic relations. The court remanded to the trier of fact for a determination of whether a bank with an assignment of accounts receivable proceeded in a commercially reasonable way when it notified account debtors to make payments directly to it even though some of the account debtors had already paid their accounts.

If the transaction is actually an outright sale of accounts or other third-party instruments, the deficiency and surplus provisions of this subsection apply only if the security agreement so provides. The leading case on the distinction between security assignments and outright sales is Major's Furniture Mart, Inc. v. Castle Credit Corp., Inc., 602 F.2d 538 (3d Cir. 1979).

Revisor's Note:

Former section 84-9-502 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Subsection (2) contains an exception to the provisions in article 9 of the Code relating to secured loans, Charles H. Oldfather, 14 K.L.R. 571, 580 (1966).

Similarity of section and prior case law discussed, J. Eugene Balloun, 16 K.L.R. 437, 439 (1968).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 310, 311 (1979).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 822, 825 (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).

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. Applied in determining that summary judgment would not stand; issues of fact to be resolved. Pedi Bares, Inc. v. First National Bank, 223 Kan. 477, 482, 575 P.2d 507.

2. Priority between right of setoff and perfected security interest examined. Bank of Kansas v. Hutchinson Health Services, Inc., 13 Kan. App. 2d 421, 426, 773 P.2d 660 (1989).

3. 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).

4. Mischaracterization in financing statement of membership units in limited liability company was not "seriously misleading" where statement described number of units and identified parties by name under the facts of the case. In re Brown, 479 B.R. 112 (Bkrtcy. D. Kan. 2012).