Brief ⁽¹⁾

SB 366 incorporates major revisions to Article 9 of the Uniform Commercial Code as recommended in 1998 by the National Conference of Commissioners on Uniform State Laws.

Scope Expanded. SB 366 expands the "scope" of Article 9 by increasing the kinds of property in which a security interest can be taken by a creditor. New kinds of collateral that are included in revised Article 9 include: sales of payment intangibles and promissory notes; security interests created by governmental debtors; health insurance receivables; consignments; and commercial tort claims.

Perfection. Filing a financing statement remains the dominant way to perfect a security interest in most kinds of property under SB 366. It is made clear in SB 366 that filing a financing statement will perfect a security interest, even if there is another method of perfection. The time frame for automatic perfection for a purchase money security interest is increased from ten days to 20 days under SB 366.

Choice of Law. SB 366 chooses the state law that is the location of the debtor and if the debtor is an entity created by registration in a state, the location of the debtor is the location in which the entity is created by registration.

The Filing System. SB 366 in its definitions and provisions allow the transition from paper to electronic filing without further revision of the law. The bill also makes filing office operations more ministerial since the office that files financing statements has no responsibility for the accuracy of information on the statements and is fully absolved from any liability for the contents of any statements received and filed. Finally, there is no signature requirement for a financing statement.

Consumer Transactions. SB 366 makes a clear distinction between transactions in which the debtor is a consumer. Enforcement of a security interest that is included in a consumer transaction is handled differently in certain respects as a result. Examples of consumer provisions are: a consumer cannot waive redemption rights in a financing agreement; a consumer buyer of goods who prepays, in whole or in part, has an enforceable interest in the purchased goods and may obtain the goods as a remedy; a consumer is entitled to disclosure of the amount of any deficiency assessed against him or her, and the method for calculating the deficiency; and, a secured creditor may not accept collateral as partial satisfaction of a consumer obligation, so that choosing strict foreclosure as a remedy means that no deficiency may be assessed against the debtor. Although it governs more than consumer transactions, the good faith standard becomes the objective standard of commercial reasonableness under SB 366.

Default and Enforcement. SB 366 includes new rules dealing with "secondary" obligors (guarantors), special rules for some of the new kinds of property subject to security interests, new rules for the interests of subordinate creditors with security interests in the same property, and new rules for aspects of enforcement when the debtor is a consumer debtor. Some of the new rules include: a secured party (creditor with security interest) is obliged to notify a secondary obligor when there is a default, and a secondary obligor generally cannot waive rights by becoming a secondary obligor; a secured party who repossesses goods and sells them is subject to the usual warranties that are part of any sale; junior secured creditors (subsequent in priority) and lienholders who have filed financing statements, must be notified when a secured party repossesses collateral; and, if a secured party sells collateral at a low price to an inside buyer, the price that the goods should have obtained in a commercially reasonable sale, rather than the actual price, is the price that will be used in calculating the deficiency.

Senate Committee Amendments. The Senate Committee exempted a number of statutory agricultural liens from provisions of Article 9. See Section 11 of the bill. The Committee also inserted immunity provisions for filing officers that are contained in current law. Further, the Committee established a fee fund for the operation of the Uniform Commercial Code Division within the Secretary of State's Office to continue current practice. Finally, the Committee adopted a number of technical amendments suggested by the Uniform Law Commission.

The House Committee made several amendments to the bill. Major provisions are as follows:

• Certificate of Deposit (CD). Language was added to the definition section regarding "instrument" to provide that a security interest in a CD could be perfected by taking possession of the CD.



• Consumer Goods. Language was deleted that excludes consumer goods from certain sections to provide that consumer goods transactions are included in the bill.



• Conflicting State Law. Language was added that would include other statutes (that might conflict with the bill) not specifically referenced in the bill regarding the filing of a financing statement. Such a filing would not be necessary to perfect a security interest.



• Married Debtors. Language was added that would allow married debtors jointly engaged in business, when it is unclear whether a partnership exists, to file a financing statement in the names of the individual debtors.



• Workers Compensation. Language was added to provide that workers compensation benefits could not be subject to an assignment of rights.



• Statutory Liens. Language was added to clarify that agricultural liens do not include certain statutory liens.

The House Committee of the Whole added a provision to KSA 58-4301 (1999 Supp.) regarding purported liens against real or personal property. The amendment would expand the location where a person who believes a fraudulent lien has been filed against their property to include the district court of the county where the property is situated as a place to file for an expedited review of the lien. Under current law, a filing to expeditiously determine the status of a purported lien must be filed in the county where the purported lien was filed.

Another change would require the filing officer, upon a court finding of no valid lien, to terminate the document or instrument purporting to create the lien.

Background

SB 366 was the subject of an interim study by the Special Committee on Judiciary. The bill was heard before a subcommittee of the Senate Judiciary Committee. Representatives of the Kansas Livestock Association and others opposed bringing current statutory agricultural liens under the provisions of Article 9 as suggested by the Uniform Law Commissioners. Representatives of the Kansas Cooperative Council, the Kansas Grain and Feed Association, and the Kansas Fertilizer and Chemical Association favored adding Appendix II of the Uniform Law Commissioners' recommendations dealing with production money security interests to SB 366. The addition of Appendix II to SB 366 was opposed by the Kansas Bankers Association and the Kansas Farm Bureau. Representatives of the Secretary of State's Office also testified and suggested immunity provisions be added, the authority to rescind or refuse to file fraudulent liens be granted to filing officers, and the continuation of the fee fund.

The fiscal note on the bill as introduced estimated a one-time cost of $200,000 would be incurred by the Secretary of State's Office to purchase an image system to handle the electronic filing process and meet time limits under SB 366 and an additional $45,000 annual personnel cost for two positions from the State General Fund. The Senate Committee amendment reestablishing the fee fund is intended to cover those costs.

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