Brief(1)
S.B. 88 amends a section of the Uniform Commercial Code (UCC) dealing with Article 9--secured transactions. The bill clarifies that provisions of Article 9 do not prevent the transfer of ownership of accounts or chattel paper. Further, the bill provides that the determination of whether a particular transfer of accounts or chattel paper constitutes a sale or transfer of a security interest is not governed by Article 9 of the Code.
Background
S.B. 88 was requested by Raytheon Aircraft Credit Corporation (Raytheon), which has experienced a problem in its sales of secured aircraft receivables. The bill was also supported by the Kansas Bankers Association.
This problem stems from some language in a 1993 federal Tenth Circuit Court of Appeals decision. Proponents said that in order to protect Kansas transactions in which Raytheon and other sellers of receivables are involved, the best solution to the problem is amendment of the Kansas UCC, as proposed in S.B. 88.
In Octagon Gas Systems, Inc., v. Rimmer, 995 F2d 948 (10th Cir. 1993), an oil patch financier name Rimmer acquired a perpetual "5% overriding royalty interest" in the revenues of a debtor that operated a natural gas gathering system. The stream of payments from this receivable came from purchasers at the wellhead. In 1988, the debtor, Meridian Reserve, filed Chapter 11 bankruptcy. As purchaser of the receivable, Rimmer had never filed an Article 9 financing statement as required by UCC �9-102(1)(b). Nevertheless, the lower court, relying on the "true sale" nature of the transaction, held that Rimmer's interest in the receivables was not part of Meridian's bankruptcy estate under �541 of the Bankruptcy Code. Therefore, Rimmer's interest was not adversely affected by the bankruptcy reorganization plan that sold the gas system to a third party "free and clear of liens." The court concluded that Rimmer had previously carved out his interest when be obtained the 5 percent override.
The Tenth Circuit reversed the lower court decision. The court noted that Article 9 treats the interest of a receivables purchaser as a "security interest." Under �9-102(1)(b), and Article 9 applies to an outright sale of receivables. Moreover, the term "security interest" includes the interest of a receivables purchaser and the term "secured party" is defined in the statute to include a person to whom receivables have been sold outright. On the basis of these statutory definitions, the appellate court reasoned broadly that purchased receivables must remain as part of the seller's bankruptcy estate in the same way that any assets subject to a security interest would. The fact that Rimmer took "title" to the receivables was irrelevant under UCC �9-202, according to the Tenth Circuit Court. The fact that the transaction is structured as an outright sale without recourse does not keep the receivables from remaining as property of the transferor's estate under �541 of the Bankruptcy Code.
Proponents said the Octagon Gas decision was clearly wrong and has been sharply criticized by the UCC commentators.
The bill has no fiscal impact.
1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html.