72 J. Kan. Bar Assn. 8, 22-34 (2003). A Brief Overview of Revised Article 9 in Kansas.

• Author: By Hon. John K. Pearson and J. Scott Pohl

Kansas Bar Journals

Volume 72.

72 J. Kan. Bar Assn. 8, 22-34 (2003).

A Brief Overview of Revised Article 9 in Kansas

Kansas Bar Journal72 J. Kan. Bar Assn. 8, 22-34 (2003)A Brief Overview of Revised Article 9 in KansasBy Hon. John K. Pearson and J. Scott PohlI. Introduction

Revised Article 9 was adopted by the 1999 Legislature[1] effective on July 1, 2001, and has now been in effect in Kansas for three years. Although the revisions leave much of the original Article 9's conceptual structure intact, they substantially expand the applicability of Article 9 and alter the details of the documentation of transactions covered by Article 9.[2] Due to space limitations, this is a very abbreviated overview of some of the main points of the revisions. For a more comprehensive discussion, see the articles and cases cited herein.

The goal in revising Article 9 was to achieve greater certainty in creating and enforcing security interests in personal property. Whether the effort succeeded remains to be seen. However, it is clear that the new documentation and filing provisions will greatly simplify multistate transactions even though some of the documentation requirements will certainly prove problematic, especially in dealing with small businesses and individuals.

II. Summary of Key Provisions

1. Coverage expanded

   Revised Article 9 brings within its scope a number of previously excluded types of collateral, such as deposit accounts, payment intangibles, and commercial tort claims. For the most part, the new collateral types will be of interest only to transaction specialists since they relate primarily to securitization transactions.

   Although the Official Text[3] and most states expanded the coverage of Article 9 to include agricultural liens, Kansas did not, thus potentially causing more confusion than certainty. The Kansas Legislature kept the language of the Official Text but added a nonstandard definition of "statutory lien" (which are excluded from Article 9's coverage) that specifically includes most (but potentially not all) mechanic's and agricultural liens.[4]

2. Medium neutral language

   Revised Article 9 facilitates current and future transaction and documentation methods, such as electronically stored records, by adopting medium neutral language in most definitions. For example, in Revised Article 9 the terms "record" and "authenticate" replace the documentation and signature requirements of old Article 9.[5] Although paper documentation is still permitted, these changes allow for the electronic creation, filing, and storage of most records (documents). The changes should also deal with any remaining reluctance of the courts to admit electronically stored records into evidence.[6]

3. Simplified filing requirements

   Revised Article 9 greatly simplifies filing requirements by changing the filing location rules as well as adopting a uniform financing statement (Uniform Commercial Code (UCC-1)) accepted in all states. Central filing will be required for all financing statements covering personal property except fixtures, as extracted minerals (hereafter collectively "fixtures, etc.") and timber to be cut, which must still be filed locally.[7] As discussed below, a debtor's location is based on the state of organization for registered entities, principal place of business for general partnerships and proprietorships, and principal residence for individuals.[8] Moreover, as long as the debtor's location remains the same, movement of the collateral from one state to another does not affect perfection. When the debtor permanently relocates, refiling may be required.[9]

4. New PMSI rules

   Revised Article 9 eliminates the Purchase-Money Security Interest (PMSI) in crops, adds a provision for a PMSI in livestock, and makes PMSI rules similar (but not identical) for inventory, equipment, and livestock.[10]

5. Enforcement

   Revised Article 9 makes minor changes to the foreclosure rules formerly found in Part 5 of Article 9. New forms for notifying the debtor of the intended sale or disposition of collateral are prescribed by statute for consumer and commercial transactions.[11] As adopted in Kansas, in the event of a noncommercially reasonable disposition of the collateral, the collateral is rebuttably presumed to be worth an amount equal to the outstanding debt, requiring the creditor to rebut the presumption in order to obtain a deficiency judgment.[12] Revised Article 9 now implies Article 2 warranties in any sale of collateral by a secured lender.[13] Finally, Revised Article 9 establishes statutory damages for noncompliance with the Article.[14]

6. Transition

   Revised Article 9 adopts a number of transition rules to govern the filing of continuation statements and other documents relating to secured transactions which antedate the effective date.15 While, in general, prerevision security interests that were properly perfected under old Article 9 remain enforceable, refiling may be required in certain instances.16

   III. What has not changed

   The basic requirements for the creation and perfection of a security interest remain unchanged. In order to create and perfect a security interest, the security agreement must be authenticated and a financing statement describing the collateral must be filed. Practioners should, however, be careful to review the details regarding authentication and perfection to take into consideration subtle changes.

1. Security agreement

   As before, a security interest attaches when value has been given, the debtor has rights in the collateral, and the debtor has authenticated a record that provides a description of the collateral.17

2. Financing statement

   As before, a financing statement must be filed to perfect most security interests.18 All financing statements covering personal property other than fixtures, etc., must be filed centrally.19 The debtor's location controls the state in which filing must be made and is

   discussed later in this article. Perfection of a security interest in aircraft, titled vehicles, and certain types of manufactured homes must be perfected under the laws relating to titled vehicles or applicable federal law.[20] In most cases involving securities, deposit accounts, and financial documents, control may be the sole means of perfection.[21] Although Revised Article 9 continues the requirement that the financing statement identify the debtor, it gives more detailed rules for the sufficiency of the debtor's name.[22]

3. Duration and lapse

   With the exception of security interests in manufactured homes and certain public finance transactions, a filed financing statement is effective for five years from the date of filing and may be continued by a continuation statement filed within six months before the expiration of the five-year period.[23]

4. Automatic perfection/ perfection upon attachment

   Revised Article 9 continues the rules relating to automatic perfection upon attachment in consumer transactions (but eliminates the value cap) and a number of other transactions generally involving the sale of promissory notes, payment intangibles, and financial assets.[24]

5. Possession

   While the Revised Article 9 now permits filing to perfect security interests in chattel paper, negotiable documents, investment property, and instruments,[25] possession of such collateral is permitted and is required when the collateral is money.[26] In general, possession or control of instruments and similar collateral will take priority over a security interest perfected only by filing.[27]

6. Control

   As before, control of certain types of securities is an appropriate means of perfecting a security interest. [28] In addition, control is required to assure priority for a security interest in collateral including deposit accounts, electronic chattel paper, investment property, and letter-of-credit rights as to competing security interests in the same collateral.[29] As with possession, a secured party in control of collateral will generally have priority over a security interest perfected earlier by filing only.[30]

7. After-acquired property/ future advances

   Revised Article 9 authorizes the security agreement to provide for a security interest in after-acquired property except in consumer goods or a commercial tort claim.[31]

8. Disposition of the collateral permissible

   As before, a security agreement that authorizes the debtor to dispose of the collateral and the security interest is not considered a fraudulent transfer.[32]

   I. Sufficiency of description

   Revised Article 9 continues the requirement that a security agreement or financing statement contain a description of the collateral that reasonably identifies the collateral.[33] The use of categories or types of collateral defined under the UCC (i.e., inventory) is still permitted.[34] However, in consumer transactions and a limited number of other situations, a description by type or class of collateral is ineffective as to after-acquired property.[35] Note that Revised Article 9 permits "supergeneric" descriptions in the financing statement such as "all assets" or "all personal property" but not in the security agreement.[36]

10. Proceeds

    The "proceeds" to which a security interest attaches includes "whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral."[37] Revised Article 9 codifies the court-made rule that supporting mortgages and other documentation follow the note when the note is used as collateral for a loan under the UCC.[38]

11. Buyers in the ordinary...