KANSAS COMMENT, 1996

This section does not vary from the 1995 Official Text, and has partially rewritten the 1972 Official Text. 84-9-103 creates two basic rules for determining whose law applies when more than one jurisdiction has contact with the debtor and the collateral. Generally, in those situations in which the situs of the collateral is deemed to be controlling, the law of the jurisdiction of the situs will control. Where the drafters determined that the law of the situs was not as important as the location of the debtor, because the collateral moved or because the collateral was an intangible, the law of the jurisdiction where the debtor is located is considered controlling.

Where the location of the collateral is deemed controlling, a problem can arise if the situs of the collateral can or has moved. Many of the provisions look to the law of the situs of the collateral at the time the "last event" on which perfection is asserted. To paraphrase the rule, perfection is usually asserted when a security interest has attached and the proper filing has taken place, or when the security interest has attached and the secured party is in possession pursuant to agreement of the parties. Thus the "last event" will be the last of all the events necessary for asserting that the security interest has attached and any additional events necessary for perfection have occurred. There are usually four things that take place for perfection.

Attachment is controlled by 84-9-203(1) and requires three events. The first, 84-9-203(1)(a), is that the collateral is in the possession of the secured party pursuant to agreement, or that the debtor has signed a security agreement describing the collateral (and the land, if the collateral is crops). The second, (b), is the agreed upon value has been given (the consideration supporting the contract — the security agreement creating a security interest). This is normally the loan to the debtor. The third, (c), is that the debtor has rights in the collateral. If the debtor already owns the collateral, this event has occurred first. If the loan is made to allow the debtor to acquire the collateral, this event will have occurred when the debtor has rights in the collateral.

Perfection, the fourth event, is controlled by 84-9-303. It provides that the security interest is perfected when it has attached and the steps required for perfection have been taken. The usual steps for perfection are duly filing a financing statement, 84-9-302, or taking possession of the collateral, 84-9-305. Occasionally, perfection is automatic, as in 84-9-302(1)(d).

The four events which must usually have occurred for there to be a claim of perfection are: a security agreement or the agreed possession of the collateral, the value (consideration) has been given, the debtor has rights in the collateral, and fourth, the acts for perfection (a proper filing or possession by the secured party). The last event—collateral situs rule of 84-9-103 provides that the law of the state where the collateral is when the last of those events occurs, controls.

Choice-of-law provisions in the security agreement cannot control how to perfect a security interest, because third parties are involved. See 84-1-105(2). For example, if the debtor's ordinary factory equipment is located in Nebraska and is to remain there at the time the security agreement is entered into and the loan is made in Kansas, perfection must be accomplished by filing in Nebraska, using Nebraska's filing rules, not Kansas, even though the debtor may be headquartered here. This is because the equipment is in Nebraska when the last event on which the assertion of perfection is based, filing. In conclusion, the rule in multistate transactions is choosing whose law controls the place of filing to perfect, and the conflict of laws rules in this section generally take that matter out of the hands of the parties themselves.

Subsection (1). Paragraph (1)(b) codifies the "last event" rule. The place to file is determined by the state where the situs of the collateral is located when the last event occurs on which is based the assertion that the security interest is perfected. In the case described above, the filing should be accomplished in Nebraska using the rules under its 9-401 because the equipment is located in Nebraska.

Paragraph (1)(c) is a limited exception to the situs rule for the situation where a secured party is financing the purchase of collateral in one state and where it is contemplated it will then be removed and located in another state. For example, if ABC Corp., located in Kansas, purchases a new piece of machinery from a dealer in Missouri, a Kansas bank finances the purchase by a direct loan, but ABC, the Kansas debtor, plans to bring the machinery back to its plant in Kansas following preparation of the unit, the proper place for the bank to file is with the secretary of state in Topeka, using the rule in Kansas' 84-9-401 and not in Missouri, at least so long as the machinery will be coming home to Kansas within 30 days after the loan is made. For a case applying this rule, see In re Kokomo Times Publishing & Printing Corp., 301 F. Supp. 529 (S.D. Ind. 1968). If the creditor has any doubt whether the collateral will be removed from Missouri and brought to Kansas within the 30 day period, the Kansas bank should file financing statements in both states, in Kansas, using the rule in (1)(c) and in Missouri, using the last event rule in (1)(b). It should be noted the 30 day period runs from the time the debtor receives possession of the collateral.

Paragraph (1)(d) contains the four month rule, which controls when the debtor, or any one else such as a purchaser from the debtor, removes collateral from the original state. The rule is that a security interest perfected in another state, for example Missouri, continues perfected for four months after the collateral arrives in this state, Kansas. Subparagraph (i) provides that the perfection will lapse, however, if filing or possession is required to perfect the security interest in Kansas, and if that action is not taken within the four month period. It will also lapse if the perfection expires in Missouri, for failure to file a timely continuation statement, for example. If the perfection lapses, the lapse is retroactive and the interest is deemed to have been unperfected as to "purchasers" after removal from Missouri. "Purchase" and "purchaser" are defined in 84-1-201(32) and (33) and include virtually any voluntary transaction creating an interest in the property, not just sales. Thus an innocent purchaser, another secured creditor or the trustee in bankruptcy would prevail over the original secured party. Subparagraph (ii) provides that if the necessary action, such as filing, is taken within the four month period, the security interest continues perfected and there is no lapse and no gap in perfection. Subparagraph (iii) provides that a consumer buyer from a consumer seller where the goods have been brought into this state is subject to the same rules.

Paragraph (1)(d) uses the expression "but if action is required by part 3 of this article [the 84-9-300's, especially 84-9-302 and 84-9-304 to 84-9-306] to perfect the security interest...." For most security interests, there must be either a filing or possession to be perfected. For some types of transactions, however, there is automatic perfection, the primary examples being a purchase money security interest in consumer goods costing $1000 or less and security interests in some types of proceeds under 84-9-306. Because these security interests are automatically perfected in Kansas, no action would be required to perfect the security interest and the Missouri security interest will continue to be automatically perfected even if the collateral is brought to Kansas.

If the removal of the collateral is prohibited by the security agreement, the secured party would have a cause of action against the debtor, and there will often be a cause of action against others who dealt with and removed the collateral.

If refiling is accomplished within the four month period, the security interest is continuously perfected, as indicated above. If refiling is not accomplished until after the four month grace period, the security interest is newly perfected but will be subject to any intervening interests which have priority over an unperfected security interest. If refiling is not accomplished until after the four month period, it will be effective as a perfected security interest against third parties whose interests arise after the reperfection, but there may still be problems. For example, if ABC removed the machinery to Nebraska, the Kansas bank did not refile in Nebraska until five months after arrival in Nebraska, and ABC filed for bankruptcy six months after arrival, the trustee would not prevail as a lien creditor because of the reperfection. See 11 U.S.C. § 544(a). Since bankruptcy took place within 90 days after reperfection, however, the trustee would probably prevail under 11 U.S.C. § 547 because the reperfection would constitute a "transfer" of the machinery to the bank for antecedent debt and within 90 days of bankruptcy and would be a "voidable preference."

Subsection (2). This subsection deals with titled vehicles in a multistate setting. Since virtually all states now have statutes which require that liens be noted on the certificate of title (see K.S.A. 8-135) including the neighboring state of Oklahoma (which was one of the last to adopt it) most motor vehicle cases in the future will be decided under this subsection. Under subsection (2)(b), a security interest perfected by notation of the lien on the title remains perfected when the vehicle is taken to another state and not retitled, even beyond the four-month period which would apply under the prior subsection. See, e.g., In re Smith, 311 F. Supp. 900 (W.D. Va. 1970), aff'd sub nom. Callaghan v. Commercial Credit Corp., 437 F.2d 898 (4th Cir. 1971); In re Foster, 611 P.2d 232 (Okla. 1980). In the normal case, a debtor who changes residence from one state to another will get a new title issued in the new state, and the lien from the former state will be noted on the new title, thus assuring continued perfection. But if the debtor fraudulently gets a new "clean" title issued in the state of removal, who prevails as between the lender's lien in the original state, and an innocent purchaser claiming through the "clean" title in the state of removal?

The first sentence of paragraph 84-9-103(2)(b) provides "Except as otherwise provided in this subsection [84-9-103(2)], perfection and the effect of perfection or nonperfection of the security interest are governed by the law (including the conflict of laws rules) of the jurisdiction issuing the certificate [a]until four months after the goods are removed from that jurisdiction and [b] thereafter until [c] the goods are registered in another jurisdiction, [d] but in any event not beyond surrender of the certificate." The rule provides that the originating state's law (and perfection by notation on that state's certificate of title) will continue:

a. for four months following the removal of the goods;

b. it will continue to be controlling thereafter if the goods are not reregistered;

c. i. if the goods are reregistered thereafter and the title shows the lien, the security interest is perfected in the new state, ii. if the goods are reregistered thereafter and the title does not show the lien, the security interest is no longer perfected; iii. if the goods are registered within the four month period by surrendering a counterfeit "clean" certificate of title, the originating state's law will continue to control until the expiration of four months; and

d. in any event, the four month grace period will be shortened and the originating state's law does not control if the true certificate of title is surrendered, even if four months have not passed. At that point the new state's law controls. If the true certificate is surrendered and the new certificate does not show the lien, the new state's law controls and the secured party is no longer perfected. If the true certificate is surrendered and the new certificate shows the lien, the secured party is perfected by the new state's law.

If clean title is issued by the new state, some innocent buyers are protected by 84-9-103(2)(d). Paragraph (2)(d) provides that, if the buyer in the new state is not in the business of selling goods of that kind, the innocent buyer prevails under the clean new title over the old state secured party. The buyer can therefore be a consumer or a business, as long as it is using the vehicle and is not a dealer in vehicles of that kind. If the new, competing interest in the vehicle covered by the certificate of title is not such a buyer, but is a used car dealer, a bank making a loan against the second title, or the debtor's trustee in bankruptcy, paragraph (2)(d) does not control and the matter is thrown back into subsection (2)(b).

Subsection (3). In which state should the secured party file if the collateral is an intangible with no physical situs or if the collateral is goods normally moved from one jurisdiction to another but is not subject to the certificate of title law? Under Paragraph (3)(b), the proper place to file the financing statement is the "location" of the debtor, which means the debtor's place of business or chief executive office if it has more than one place of business. Paragraph (3)(d). The creditor must determine whether the goods are "mobile" and "normally used in more than one jurisdiction." The courts have held that this definition fits self-propelled oil drilling rigs (Ray v. City Bank & Trust Co. of Natchez, 358 F. Supp. 630 (S.D. Ohio 1973)) and excavating equipment (Westinghouse Credit Corp. v. Rovi Property & Management Corp., 607 S.W.2d 682 (Ky. App. 1980)), but not coal mining equipment (Ingersoll-Rand Financial Corp. v. Nunley, 31 U.C.C. Rep. 1114 (W.D. Va. 1981)). Given the uncertainty of the definition, a careful creditor will perfect both ways, under the law of the location of the debtor for mobile goods and the law of the location of the collateral for ordinary tangible collateral.

An excellent example of mobile goods, and one which is set forth expressly in the paragraph (3)(a) is commercial harvesting machinery. For example, if the debtor is a custom cutter headquartered in Wichita, Kansas would be the proper place to file the financing statement even though the harvesting machinery goes from Texas to North Dakota during the cutting season. Paragraph (3)(a) also provides that the debtor's chief place of business is also the place to file where the collateral is accounts or general intangibles. For example, a Kansas lender should file the financing statement in Utah under Utah law if the borrower is a Utah-based corporation with a branch plant in Kansas and the collateral is accounts receivable.

Subsections (4) and (5). Subsection (4) states that the rules of subsection (1) apply to possessory security interests in chattel paper, while the rules in subsection (3) apply to nonpossessory security interests in chattel paper. Subsection (5) makes it clear that a security interest covering extracted minerals (primarily oil and gas), as well as the accounts arising from sale at the wellhead, should be perfected by filing according to the law in the state where the well is located. If the well is located in Kansas, 84-9-401(1)(b) makes it clear that local filing, not central filing, is required. See also 84-9-402(5) and 84-9-403(7).

Subsection (6). This new subsection states the normal choice of law rules for investment properties and parallels the rules for chattel paper. Most methods of perfection involve a. control of the asset or b. control of the entity which owes the asset to the debtor, such as a mutual fund, or c. filing or d. automatic perfection. Perfection and its consequences for certificated securities is normally controlled by the jurisdiction where the security is located, while for uncertificated securities, the law of the issuer's jurisdiction controls. Perfection and its consequences for a security entitlement (defined in 84-8-501 as an account with a securities intermediary) or security account (defined in 84-8-501) are governed by the law of the jurisdiction in which the securities intermediary (defined in 84-8-102(14) as the clearing corporation or broker that has the account) is located. This is a form of the situs of the underlying obligor rule. Commodity contracts and commodity accounts (both of which are defined in 84-9-115(1)) are also governed by the commodity intermediary's jurisdiction. Paragraph (f) is a special rule governing automatic perfection and perfection by filing under 84-9-115. Both of these are governed by the law of the debtor's location.

Revisor's Note:

Former section 84-9-103 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Security interests on farm products, Van Smith, 35 J.B.A.K. 299, 338 (1966).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 16 K.L.R. 437, 441 (1968).

Legislative survey, "Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 221, 222, 223 (1976).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 134 (1975).

Survey of contracts, UCCC and UCC, Franklin E. Lynch and Larry Schneider, 15 W.L.J. 324, 333, 334, 335 (1976).

"Right of Secured Party to Recover Proceeds Commingled in Debtor's Bank Account," Kristen D. Balloun, 28 K.L.R. 325, 328 (1980).

"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 493 (1986).

"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, 77, 95 (1986).

"To Be (Transformed) or Not to Be: The Transformation Versus Dual-Status Rules for Purchase-Money Security Interest Under Kansas' Former and Revised Article 9," Christopher Harry, 50 K.L.R. 1095 (2002).

"Conflict of Laws in Kansas: A Guide to Navigating the Dismal Swamp," Terri Savely Bezek, 71 J.K.B.A. No. 8, 21 (2002).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 773, 853 (2003).

CASE ANNOTATIONS

1. Chief place of business of purchasers of truck tractors used in interstate commerce was Kansas; lien required to be perfected hereunder; security interest unprotected. In re Dobbins, 371 F. Supp. 141, 143, 144, 145.

2. Four-month period is not grace period; absolute period of protection; failure to determine whether Kansas sale occurred within period, error. American State Bank v. White, 217 Kan. 78, 79, 80, 81, 82, 83, 84, 85, 86, 535 P.2d 424.

3. Collateral brought into Kansas subject to perfected security interest in another state remains subject to that security interest for period provided in other state or 4 months after removal, whichever is lesser; secured party must perfect interest in this state as provided in 84-9-302 et seq. Victory Nat'l Bank of Nowata v. Stewart, 6 Kan. App. 2d 847, 850, 851, 853, 636 P.2d 788 (1981).

4. Oklahoma bank did not perfect security interest in motor vehicle; its interest was subordinate to Kansas purchaser. Victory Nat'l Bank of Nowata v. Stewart, 6 Kan. App. 2d 847, 850, 851, 853, 636 P.2d 788 (1981).

5. Buyer not in ordinary course of business without actual knowledge of security interest (84-9-301(1)(c)) has priority over unperfected interest. Broadway National Bank v. G & L Athletic Supplies, Inc., 10 Kan. App. 2d 43, 45, 46, 691 P.2d 400 (1984).

6. Unperfected secured creditor may recover from auction company for unauthorized sale of encumbered collateral. First Nat. Bank of Amarillo v. SW Livestock, Inc., 616 F. Supp. 1515, 1516, 1521 (1985).

7. Cited; applicability of other states' laws regarding perfection or nonperfection therein, unsecured knowledgeable creditor disqualified as purchaser examined. Farmers State Bank v. Production Cred. Ass'n of St. Cloud, 243 Kan. 87, 95, 97, 755 P.2d 518 (1988).

8. Auction house agent liable for conversion where owner lacked authority to sell, notwithstanding lack of knowledge of security interest. First Nat. Bank v. Southwestern Livestock, Inc., 859 F.2d 847, 848 (10th Cir. 1988).

9. Law of jurisdiction issuing title governs perfection of security interest until four months after removal. In re Ball, 281 B.R. 706, 708 (2002).

10. Creditor's security interest no longer noted on vehicle's certificate of title held unperfected. In re Trible, 290 B.R. 838, 547 (2003).

11. Mentioned; purchase money character of the obligation was not lost through refinancings. In re Jackson, 358 B.R. 412, 417 (2007).

12. Bankruptcy case involving vehicle financing; a security interest may be part purchase-money and part non-purchase money. Citifinancial Auto v. Hernandez-Simpson, 369 B.R. 36, 45, 46 (2007).

13. In absence of agreement, payments are allocated first to nonpurchase-money debt of trade-in vehicle then to purchase money debt. In re Kellerman, 377 B.R. 302 (2007).

14. Creditor's purchase money security interest secures financed negative equity used to pay off debt on trade-in vehicle; bankruptcy case. In re Ford, 387 B.R. 827, 831, 832 (2008).

15. Negative equity in vehicle trade-in is not a purchase money obligation; bankruptcy case. In re Padgett, 389 B.R. 203, 210 (2008).