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84-9-504. Indication of collateral. A financing statement sufficiently indicates the collateral that it covers if the financing statement provides:

(1) A description of the collateral pursuant to K.S.A. 2022 Supp. 84-9-108, and amendments thereto; or

(2) an indication that the financing statement covers all assets or all personal property.

History: L. 2000, ch. 142, § 75; July 1, 2001.

Revisor's Note:

Former section 84-9-504 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

KANSAS COMMENT, 1996

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

Subsection (1). Subsection (1) enables the secured party to sell, lease, or otherwise dispose of collateral after default, applying the proceeds to (a) expenses of the sale, (b) satisfaction of the indebtedness, and (c) satisfaction of subordinate security interests if written notification of demand has been received from the subordinate secured party. Pre-UCC Kansas law was similar. Prior Kansas law accords with most of subsection (1)(a). A mortgagee of growing wheat, after taking possession, was allowed to harvest the wheat and deduct the expenses of harvesting, threshing, and marketing. Exchange State Bank v. Kirwin State Bank, 119 K. 70, 237 P. 936 (1925). Kansas amended 58-2312 in 1994 to allow collection of reasonable costs, including court costs, and either attorney fees or collection agency fees (but not both). The fees cannot include the costs of salaried employees, at least with respect to credit instruments. See K.S.A. 58-2312. In consumer cases, K.S.A. 16a-2-507 also limits costs to not more than 15% of the unpaid debt after default. These provisions reverse prior law, which prohibited adding attorney fees.

The right to sell collateral "in its then condition or following any commercially reasonable preparation or processing" suggests that the creditor need not spend front-end money to fix up the collateral unless it desires to do so. Courts have restricted preparation and processing to the overarching requirement of holding a "commercially reasonable" foreclosure sale. See Kansas Comment to subsection (3). Subsection (1) gives no clear authorization for the charging of overhead against the unpaid balance of the debt. The allocation of the proceeds can cause problems for a secured creditor who seeks to foreclose on more than one security interest and to apply the proceeds under subsection (1)(b). See Wilson Leasing Co. v. Seaway Pharmacal Corp., 220 N.W.2d 83 (Mich. App. 1974).

After payment of front-end fees and satisfaction of the foreclosing creditor's secured debt, any surplus must be turned over to subordinate debtors, but only if they make a written demand; the foreclosing senior creditor has no affirmative duty to search the files and distribute the surplus to other creditors of record. If the foreclosing creditor is not the senior secured party, the purchaser at the foreclosure sale will take subject to the senior interest. See subsection (4). Moreover, the junior creditor may be liable in conversion if the senior is not paid off. See Consolidated Equipment Sales, Inc. v. First State Bank & Trust Co., 627 P.2d 432 (Okla. 1981).

Subsection (2). After the security interests have been paid off as set forth in the prior subsection, any surplus must be returned to the debtor. For cases dealing with the exact scope of this duty, see Webster v. GMAC, 516 P.2d 1275 (Ore. 1973); Reeves v. Associates Financial Services Co., 247 N.W. 434 (Neb. 1976). This is also the subsection which authorizes recovery of any deficiency, either by a separate in personam action or under K.S.A. 60-1006, which authorizes a combination replevin and deficiency judgment. This rule may be limited if the initial foreclosure was by judicial action, however. The Kansas application of res judicata has meant that the secured party must bring the action for foreclosure and on the note in a single action or be barred. See the Kansas Comment 1996 to 84-9-501, Subsection (1) and In re Wilson, discussed there. The right to a deficiency judgment is subject to the special rule governing consumer transactions under the Kansas Consumer Credit Code (K.S.A. 16a-5-103(2)). This means that a credit seller of goods with a cash price of $1000 or less can sue the debtor personally, or go after the collateral, but it can't do both. For the leading Kansas case dealing with applicability of this anti-deficiency judgment rule, see Central Finance Co., Inc. v. Stevens, 221 K. 1, 558 P.2d 122 (1976) (finance company successfully argues that it was involved in a direct loan, not a disguised credit sale, so that the anti-deficiency judgment rule did not apply). Moreover, the right to a deficiency may not exist if the foreclosure sale is held in a commercially unreasonable manner. See Kansas Comment 1996 to 84-9-507.

The right to a surplus and the liability for a deficiency only apply when a true secured transaction is involved; if the underlying transaction was an outright sale of third-party obligations on accounts or chattel paper, there is no right to a surplus or liability for a deficiency unless the security agreement so provides. For the leading case on the distinction between an outright sale of third-party obligations and a security assignment, see Major's Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538 (3d Cir. 1979).

Subsection (3). This critical subsection sets forth the ground rules governing foreclosure sales. The keystone is commercial reasonableness, a term not defined in Article 9. Although this subsection sets some rules in cement, such as the requirement of notice to the debtor and the prohibition against the secured party's bidding in at a private sale, the commercial reasonableness of the sale will generally turn on the facts of each situation. The leading Kansas case on point is Westgate State Bank v. Clark, 231 K. 81, 642 P.2d 961 (1982), where the Kansas supreme court held that commercial reasonableness is a question of fact to be determined in each case by the trier of fact and that, in an action for a deficiency, the secured creditor has the burden of proving that the disposition of the collateral was handled in a commercially reasonable manner. The trial court should consider all of the relevant factors together as part of a single transaction.

The nine factors identified by the court in the Clark case, and which can be used by the foreclosing creditor as a checklist, are as follows:

(1) The duty to clean up, fix up, and paint up the collateral. If the cost of preparing the collateral is small in comparison to the value it would add, the creditor should spend the extra money in order to generate bidder interest at the sale. If the cost is substantial, however, the creditor could point the court to the language in subsection (1) which gives the creditor an option to dispose of the collateral "in its then condition." For a Tenth Circuit case which imposes a fix-up duty on the creditor, see Liberty Nat'l Bank & Trust Co. v. Acme Tool Div. of Rucker Co., 540 F.2d 1375 (10th Cir. 1976).

(2) Public or private disposition. Although this subsection gives the secured party an option to dispose of the collateral at public sale (auction) or privately (negotiated sale or bids from a limited group), Official Comment 1 suggests that a private sale should be used whenever such a disposition is likely to result in a higher return. See United States v. Terrey, 554 F.2d 685 (5th Cir. 1977) (SBA made commercially unreasonable "quickie" public auction). As with other factors, the public-private decision will depend on the nature of the collateral and the commercial setting. It should be noted that the secured party is in general forbidden from bidding in at a private sale.

(3) Wholesale or retail disposition. A retail sale, though it may bring in more money, is not required in all situations by this section. Such a sale may involve more expense and trouble for the creditor. Sale to a dealer (as through a dealer auction) on the wholesale market may be the more reasonable approach in many cases. See 84-9-507(2) and Official Comment 2 to 84-9-507. Much might depend on the nature of the foreclosing creditor; if a bank is involved, a wholesale dealer disposition would normally be appropriate, but if a dealer does the foreclosing after picking up the obligation under a recourse or repurchase obligation, a retail sale by the dealer might be the only appropriate method of disposition. A good discussion by Judge Posner of the pros and cons of each type of sale is contained in Contrail Leasing Partners, Ltd. v. Consolidated Airways, Inc., 742 F.2d 1095 (7th Cir. 1984).

(4) Disposition by unit or in parcels. Although this subsection provides that disposition "may be as a unit or in parcels," the linchpin remains commercial reasonableness. Thus, the secured party may have a duty to dispose of collateral on a piecemeal basis if such a method would generate a higher price. Depending upon the nature of the collateral, it may be more reasonable to sell everything as a "package deal." See, e.g., First Nat'l Bank v. Holston, 559 P.2d 440 (Okla. 1976). And of course there is no prohibition against offering the collateral both as a unit and on a piece-by-piece basis, with the final choice depending upon which brings the better price.

(5) The duty to publicize the sale. In order to generate a "lively concourse of bidders," the foreclosure sale—public or private—must be surrounded with solid publicity. This means that the collateral must be adequately described with ample opportunity for inspection prior to sale, and that the exact time, place and terms of sale should be set forth. If the collateral is exotic equipment, consideration should be given to advertising in appropriate trade journals. Judge Posner discusses this in Contrail Leasing Partners, Ltd. v. Consolidated Airways, Inc., 742 F.2d 1095 (7th Cir. 1984).

(6) Length of time collateral held prior to sale. On the one hand, the secured party should not act too hastily and thus miss the opportunity to generate that "lively concourse of bidders." On the other hand, there should be no undue delay. Of course if the market is depressed, it would normally be commercially reasonable to hold off the sale until conditions improve. Conversely, if the collateral is perishable or needs constant attention (such as livestock), a quicker sale may be mandatory. Note that the subsection does not set forth any specific times within which the sale must be held. Compare 84-9-505(1), which imposes a requirement that "strict foreclosure" under that provision take place within 90 days after the secured party repossesses.

(7) Duty to give notice of the sale to the debtor and competing secured parties. Unless the debtor signs a post-default waiver, it is mandatory that the secured party send to the debtor "reasonable notification of the time and place of any public sale or reasonable notification of the time after which any private sale or other intended disposition is to be made." The term "debtor" is defined in 84-9-105(1)(d) to include any person "who owes payment or other performance of the obligation secured." This includes not only the primary obligor, but any co-makers, guarantors, recourse dealers, or those who have pledged their own collateral for the debt, but are not personally liable on the debt. Nor should these third parties be able to waive the right to notice prior to default, given the plain language of 84-9-501(3). Notice need not be given to competing secured creditors unless the credit transaction is non-consumer in nature and the competitors have sent written notification of their interest to the foreclosing creditor before the secured party has sent notice to the debtor or before the debtor has waived the notice.

No notice need be given if collateral is "perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market." "Perishable or threatens to decline speedily in value" should be interpreted to encompass the second phrase, "threatens to decline speedily in value," with perishable being one example of the risk to the collateral. "Decline speedily" is in comparison to the length of time that the debtor should have notice to protect its interests. Although a bad market might cause commodities to decline speedily in value, absent unique circumstances, it is safer to give notice to the debtor. The courts have generally limited the "recognized market" exception to securities or commodities for which standard price quotations act as a safeguard, and with commodities, there will be difficulties if individual items can change the price, as with livestock. Since the purpose of the notice is to enable the debtor to redeem the collateral under 84-9-506, and to work up additional bidder interest, it must be given a reasonable period of time in advance of the sale. The standard around the country, and in Kansas, appears to be ten days. Although the subsection does not make it clear whether the notice must be written, the Clark decision does not clarify the point, and most of the case law in other jurisdictions requires written notice (see White & Summers at 34-13), the only safe approach for the secured party is to put the notification of sale to the debtor in writing. See White & Summers at § 34-13. Finally, there is case law which imposes a "second try" requirement on a secured party who receives a certified mail notice returned "unclaimed" but who has actual knowledge of the debtor's whereabouts. See, e.g., In re Carter, 511 F.2d 1203 (9th Cir. 1975).

(8) The actual price received at the sale. Although 84-9-507(2) expressly provides that a foreclosure sale is not per se commercially unreasonable just because a better price might have been obtained by a sale at a different time or by a different method, it is a factor and the courts will frown at a sale which yields a shockingly low price unless the secured creditor can offer a valid explanation. However, if a low price is obtained in a sale for which all procedures were handled in line with this subsection, the creditor has a much stronger argument that the sale should not be considered commercially unreasonable.

(9) Other factors. The Kansas supreme court in Clark, a case involving commercial collateral, also identified as relevant to commercial reasonableness the number of bids received and the method employed in soliciting bids, particularly with respect to private sales. In the Clark case itself, the supreme court sustained the trial court's findings that a foreclosing bank did not dispose of recreational vehicles in a commercially reasonable manner because only five or six bids were solicited by telephone and there was no advertising for the private sale. For another decision from the Tenth Circuit which grapples with the elements of commercial unreasonableness, see Barbour v. United States, 562 F.2d 19 (10th Cir. 1977) (applying Kansas law).

If a foreclosure sale involves expensive collateral, and the creditor is concerned about later attack on the sale as commercially unreasonable, consideration should be given to prior judicial approval or confirmation, an option expressly contemplated by 84-9-507(2). For the related issue of the appropriate sanctions for creditor misbehavior in holding a commercially unreasonable foreclosure sale, see Kansas Comment 1996 to 84-9-507(1).

Subsection (4). This subsection, which deals with the title to collateral sold at foreclosure, provides that a purchaser for value at a foreclosure sale takes free under certain circumstances from any rights of the debtor and of the holders of security interests junior to the foreclosing party even though the foreclosing party has not complied with the requirements of Part 5 of Article 9. If the public sale is involved, such a purchaser takes free if he has no knowledge of defects in the sale (e.g., failure to give notice to the debtor) and is not in collusion with parties involved in the sale. If a private sale is involved, it is only necessary that the purchaser be in "good faith," a term defined in 84-1-201(19) as subjective "honesty in fact." It should be noted that, if a junior secured party holds the foreclosure sale, the lien of the senior secured creditor is not cut off and the purchaser takes subject to it. Moreover, the junior forecloser runs the risk of conversion in such a case if the senior's permission has not been obtained.

Subsection (5). Subsection (5) provides that where a secured party transfers repossessed collateral to a person liable under a recourse, repurchase or guaranty agreement, the person liable under the agreement thereafter has the rights and duties of the secured party, and such transfer is not a sale or disposition of the collateral under Article 9. In a non-recourse situation, the financier buying dealer paper will hold the foreclosure sale and the sales price will set the deficiency (or surplus). But where the dealer paper is sold on a recourse or repurchase basis, the transfer back from financier to dealer is not the Article 9 "sale or disposition;" instead, the subsequent sale by the dealer (often at retail rather than wholesale) is the relevant disposition and determines the existence of a surplus or the size of any deficiency. In other words, recourse arrangements normally involve a two-step disposition.

The doctrine of subrogation is codified in this subsection. In the recourse situation described above, the dealer who paid off the financier would step into the financier's shoes for purposes of the foreclosure sale. The duty to hold a commercially reasonable sale would fall on the shoulders of the dealer (or other guarantor) which purchased the obligation following the primary debtor's default. The right to a surplus would also belong to the dealer. But must the dealer or other guarantor make full payment to the financier before it has any rights of subrogation under Article 9? In Kansas, the answer is no. Benschoter v. First Nat'l Bank of Lawrence, 218 K. 144, 542 P.2d 1042 (1975) holds that a dealer who, under a repurchase agreement, pays off the bank which purchased the installment contract, can be subrogated to the repossession and foreclosure rights of the bank under this subsection even though the dealer had not paid the full amount of the contract to the bank until after the repossession.

Law Review and Bar Journal References:

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

Discussed with reference to farming operations as collateral, Van Smith, 35 J.B.A.K. 299, 339 (1966).

Survey of Kansas commercial law (1965-1969), 18 K.L.R. 388, 396 (1970).

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

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 226, 227 (1976).

"Recovery of Attorney Fees in Kansas," Mark A. Furney, 18 W.L.J. 535, 544 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 309 (1979).

"Uniform Commercial Code: Aspects of a Commercially Reasonable Sale of Repossessed Property," Jon D. Graves, 19 W.L.J. 123 (1979).

"Uniform Commercial Code: Deficiency Judgments in a Commercially Unreasonable Setting," Michael L. Happe, 22 W.L.J. 160, 166 (1982).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 367 (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, 184 (1985).

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

"Debtor's Remedies When Debitor Seeks Deficiency Judgment on a Consumer Installment Contract," John E. Cowles, XIV J.K.T.L.A. No. 4, 18, 19 (1991).

"Creditor Beware: From Default Through Deficiency Judgment," Wanda M. Temm, 60 J.K.B.A. No. 8, 17, 21 (1991).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 825 (2003).

CASE ANNOTATIONS

1. Paragraph (5) applied; guarantor's subrogation to rights of creditor determined. Mountain Iron & Supply Co. v. Jones, 201 K. 401, 408, 441 P.2d 795. Rehearing denied, 201 K. 824, 443 P.2d 185.

2. Applied; stock given as security for note sold by bank; counterclaim denied. Union National Bank of Wichita v. Brungardt, 214 K. 641, 642, 522 P.2d 371.

3. Rules stated; who must carry burden of proof as to commercial reasonableness of sale and amount of loss. Transport Equipment Co. v. Guaranty State Bank, 518 F.2d 377, 384.

4. Applied; lender did not make "all in the family" loan; not precluded from obtaining deficiency judgment against debtor. Central Finance Co., Inc. v. Stevens, 221 K. 1, 8, 558 P.2d 122.

5. Subsection (3) construed; equipment which secured note not sold in a commercially reasonable manner. Barbour v. United States, 562 F.2d 19, 20.

6. Voluntarily surrendered secured property not obtained through "legal process"; tax lien does not attach to buyer of same. Robbins-Leavenworth Floor Covering, Inc. v. Leavenworth Nat'l Bank & Trust Co., 229 K. 511, 512, 625 P.2d 494.

7. Applied; creditor sale of collateral not in "commercially reasonable manner"; test; deficiency not barred. Westgate State Bank v. Clark, 231 K. 81, 86, 92, 93, 94, 642 P.2d 961 (1982).

8. Upon default, secured party may proceed by action, or without judicial process if done without breach of peace, and thereafter dispose of collateral. Clark Jewelers v. Satterthwaite, 8 K.A.2d 569, 572, 662 P.2d 1301 (1983).

9. Cited; statutes involving agisters' liens (58-220) and for feed and care of livestock (58-207) discussed in depth. Hermes v. Stackley, 10 K.A.2d 342, 347, 699 P.2d 560 (1985).

10. Foreclosing creditor has no duty to search UCC files or, absent written notice, disclose pending sale or subsequent purchaser's name. Utility Trailers of Wichita, Inc. v. Citizens Nat'l Bank & Tr. Co., 11 K.A.2d 421, 425, 726 P.2d 282 (1986).

11. Creditor must notify debtor of sale; waiver of notice must be after default; auto auction not recognized market. Garden Nat'l Bank v. Cada, 11 K.A.2d 562, 566, 567, 729 P.2d 1252 (1986).

12. 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).

13. Repossessed household goods in hands of lender/creditor with nonpossessory, nonpurchase money security interest as not exempt examined. In re Ferguson, 67 B.R. 246, 249, 253 (1986).

14. Commercial reasonableness requirement extends to guarantors and cannot be waived; impairment of collateral rule applicable in certain cases. U.S. v. Hunter, 652 F.Supp. 774, 778, 781 (1987).

15. Reasonable notice to debtor of disposition of collateral required; collateral transfer by secured party to dealer; deficiency owed by debtor determined. Topeka Datsun Motor Co. v. Stratton, 12 K.A.2d 95, 99, 100, 101, 102, 103, 736 P.2d 82 (1987).

16. Cited; auto auction limited to dealers and excluding public is a private sale; notice required in (3) met. Garden Nat'l Bank v. Cada, 241 K. 494, 498, 738 P.2d 429 (1987): Reversing 11 K.A.2d 562, 729 P.2d 1252 (1986).

17. Commercial unreasonableness defense available to guarantor. U.S. v. Kelley, 890 F.2d 220 (1989).

18. Fact that better price possible if sale held differently does not alone establish sale was not "commercially reasonable". U.S. v. Cox, 731 F.Supp. 1023 (1990).

19. Cited; discussion of attorney fees included in security agreement "if permitted." Halloran v. North Plaza State Bank, 17 K.A.2d 840, 841, 843, 844 P.2d 764 (1993).

20. Where attorney fees could have been recovered from sale of collateral that was converted, reasonable attorney fees can be part of damages of conversion. Millennium Financial Services, LLC v. Thole, 31 K.A.2d 798, 74 P.3d 57 (2003).

21. 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).


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