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KANSAS COMMENT, 1996

This section, which was not amended, does not vary from the 1995 Official Text. It allows the parties to give the debtor considerable freedom in dealing with the collateral and its proceeds. The rule of Benedict v. Ratner, 268 U.S. 353 (1925) is rejected, and a security interest may be given on a shifting stock of goods, the very essence of inventory lending. The last sentence makes clear that this section does not mean that the holder of an unfiled security interest whose perfection depends on possession of the collateral, personally or by a bailee, may allow the debtor access to and control over the goods without thereby losing his perfected interest. The common law rules on perfection of pledges are not relaxed.

Former K.S.A. 58-805, which accorded with the principle of this section, provided that the assignor of accounts receivable could deal with the property which gave rise to the account, and could grant the account debtor credits, allowances, or adjustments, all without invalidating the assignment of the account, whether the assignee consented to such acts or not. But older Kansas case law was stricter than this section, and if the mortgagee allowed the mortgagor to retain possession of the collateral, and sell it without accounting for the proceeds of applying them to the debt, the transaction was void. Chapin v. Jenkins, 50 K. 385, 31 P. 1084 (1893); Richardson v. Jones, 56 K. 501, 43 P. 1127 (1896); Humphrey v. Mayfield, 63 K. 208, 65 P. 234 (1901). However, the mortgagee could allow the mortgagor to retain possession, sell the collateral, and apply the proceeds to the debt. Saddlery Co. v. Gray, 63 K. 79, 64 P. 987 (1901). Allowing the mortgagor to sell the stock of goods without applying the proceeds on the mortgage debt would, under the old rules, have invalidated the transaction, even though the mortgagor was required to replenish the security as it was sold. Bussert v. Quinlan, 267 F.2d 219 (10th Cir. 1959).

The sharp contrast between pre-UCC Kansas case law and this section epitomizes the philosophy of Article 9 to encourage the "floating lien." For judicial decisions which support this philosophy, see Community Bank v. Jones, 566 P.2d 470 (Ore. 1977); In re Mid State Wood Products Co., 323 F. Supp. 853 (N.D. Ill. 1971); In re United Thrift Stores, Inc., 242 F. Supp. 714 (D.N.J. 1965), aff'd 363 F.2d 11 (3d Cir. 1966); Sowards v. State, 224 S.E.2d 85 (Ga. App. 1976). Nor is there anything in the Bankruptcy Reform Act of 1978 which would preempt this section (see 11 U.S.C. §§ 544 (b) and 548 regarding fraudulent conveyances), although allowing the debtor to build up the aggregate of inventory, accounts and proceeds within 90 days before bankruptcy could cause the increment to be lost to the trustee in bankruptcy as a voidable preference. 11 U.S.C. § 547(c)(5).

Revisor's Note:

Former section 84-9-205 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Cited in article on "floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 575 (1966).

"Commercial Law—Problems with Identifiable Proceeds and Transfers in Ordinary Course in Floor Plan Financing," Richard L. Cram, 30 K.L.R. 478, 481, 484, 486, 487, 489 (1982).

"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).

CASE ANNOTATIONS

1. Section mentioned; purpose discussed; conviction under 21-3734 upheld. State v. Ferguson, 221 Kan. 103, 107, 558 P.2d 1092.

2. Bank's application of funds in debtor's account to antecedent debt should not be considered transaction in ordinary course of business to defeat perfected security interest (dissenting opinion). Tuloka Affiliates, Inc. v. Security State Bank, 229 Kan. 544, 557, 627 P.2d 816.