KANSAS COMMENT, 1996

This section, which was not amended, does not vary from the 1995 Official Text. It applies when the secured party has possession of the collateral before default (i.e., under a pledge), or when he has taken possession of the collateral after default (i.e., repossession). It should be read in conjunction with the 84-9-500's.

Subsections (1) and (3). Subsection (1) states the general duty to preserve collateral; it codifies a pledgee's duty under the common law. Under 84-1-102(3) the duty to exercise reasonable care may not be disclaimed in the security agreement or elsewhere. This changes pre-UCC Kansas law, which gave the pledgee broader freedom of contractual disclaimer. See Hunter v. Hamilton, 52 K. 195, 34 P. 782 (1893).

Since the standard of reasonable care imposed by this subsection is purposely lacking in precision, its meaning will depend on case law. For example, the ancient Kansas decision in Semple & Birge Mfg. Co. v. Detwiler, 30 K. 386, 2 P. 511 (1883), which held that a pledgee of notes who agreed to collect the notes was liable when the notes became barred by the statute of limitations if they were collectible when delivered, should still be good law under this subsection. If the creditor uses repossessed collateral in an unauthorized way prior to foreclosure sale, he may well be liable for damages. See Moran v. Holman, 514 P.2d 817 (Alaska 1973).

Does the secured party have a duty to sell collateral falling in value? The decisions, which typically involve securities held by a pledgee, have been rather protective of the secured creditor. See, e.g., Hutchison v. Southern California First National Bank, 27 Cal. App.3d 572, 103 Cal. Rptr. 816 (1972); Fidelity Bank & Trust Co. v. Production Metals Corp., 366 F. Supp. 613 (E.D. Pa. 1973); New Jersey Bank v. Toffler, 353 A.2d 116 (N.J. Super. 1976); Tepper v. Chase Manhattan Bank, N.A., 376 So.2d 35 (Fla. App. 1979) (pledgee's duty under this section is limited to physical care of collateral). With respect to the duty of a pledgee to convert debentures, where failure to convert means a precipitous loss in value, the courts have generally held in favor of the debtor. See, e.g., Traverse v. Liberty Bank & Trust Co., 5 U.C.C. Rep. 535 (Mass. Super. 1967) (bank liable for failing to convert); Reed v. Central National Bank of Alva, 421 F.2d 113 (10th Cir. 1970) (bank held liable for failing to convert debentures into common stock after demand by debtor).

Subsection (3) sets forth the measure of damages for violation of the duty of care, i.e., "any loss" caused by the creditor's negligence. However, the security interest is not rendered void. In certain cases, misbehavior by a pledgee or repossessing creditor might also constitute conversion. For pre-UCC Kansas cases on this point, see Boam v. Cohen, 94 K. 42, 145 P. 559 (1915) (but pledgee entitled to offset for debt), and Lynn v. McCue, 94 K. 761, 147 P. 808 (1915).

Subsection (2). Guidelines are set forth in this subsection covering various aspects of a pledgee's rights and duties. All of these guidelines are subject to variation by agreement, although 84-1-102(3) would prohibit any attempt to disclaim negligence. Under subsection (2)(a) a pledgee (or foreclosing creditor) may charge back to the debtor reasonable expenses incurred in custody and preservation of the collateral. See, e.g., J. T. Jenkins Co. v. Kennedy, 45 Cal. App. 3d 474, 119 Cal. Rptr. 578 (1975) (delinquent state fuel taxes). Pre-UCC Kansas case law such as Thorp v. Fleming, 78 K. 237, 96 P. 470 (1908) (mortgagee of growing wheat, after taking possession, may harvest the wheat and deduct the expenses of harvesting, threshing, and marketing) should remain good law under this subsection. See also 84-9-504(1)(a).

With respect to subsection (2)(b), the risk of accidental loss is on the debtor "to the extent of any deficiency in any effective insurance coverage." When the secured party's interest is insured and the debtor's is not, the secured party bears the risk of loss. And if the collateral is accidently destroyed, the secured obligation is discharged to the extent of the secured party's insurance protection. The secured party must collect from its insurer; it cannot sue on the debt except with respect to any "deficiency." Thus, a secured creditor whose interest is protected by insurance cannot, upon accidental loss of the collateral, collect both insurance and the debt. Conversely, if the collateral is not insured at all and is accidently destroyed, the risk of loss is on the debtor and the obligation is not discharged.

Subsection (2)(c) provides that the secured party may hold as additional security any increase or profits received from the collateral, such as stock dividends; by contrast, money profits such as cash dividends or bond interest payments may not be held as additional collateral in the absence of a clause in the pledge agreement, but must be remitted to the debtor or used to reduce the debt. Compare the pre-UCC Kansas case, Rundquist v. O'Leary, 184 K. 496, 337 P.2d 1017 (1959), where the court held that interest on securities was not included in the pledge in the absence of an agreement or statute. For an application of this subsection to accounting for profits in a dealer reserve account, see General Electric Credit Corp. v. Alford & Associates, 374 So. 2d 1316 (Ala. 1979).

Under subsection (2)(d), the secured party must keep the collateral identifiable, although fungible collateral can be commingled.

Subsection (2)(e) provides that the secured party may repledge the collateral on terms which do not impair the debtor's right to redeem it. For example, if an individual loans $5,000 to a debtor secured by stock, sale of the stock to X in the absence of the debtor's default would violate the "preservation" duty of subsection (1); but if the pledgee simply repledges the collateral as security for its own debt, this subsection okays the repledge. The repledge does not constitute a conversion. See SEC v. H. L. Rodger & Bros., 444 F.2d 1077 (7th Cir. 1971); McRae v. Vogler, 536 P.2d 509 (Ore. 1975).

Subsection (4). This subsection allows use or operation of the collateral by the secured party (1) to preserve the collateral, (2) pursuant to order of a court, or (3) as provided in the security agreement (except in the case of consumer goods). Reasonable expenses are chargeable to the debtor under subsection (2)(a).

Revisor's Note:

Former section 84-9-207 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 32 K.L.R. 351, 363 (1984).

CASE ANNOTATIONS

1. When a guarantor pays the principal's debt, the guarantor becomes subrogated to the rights of the creditor. The entire debt must be paid before a right of subrogation arises. Halpin v. Frankenberger, 231 Kan. 344, 348, 349, 644 P.2d 452 (1982).

2. When growing crops are subject of security agreement, determining who is responsible for care and preservation is factual question. First Nat'l Bank v. Milford, 239 Kan. 151, 156, 718 P.2d 1291 (1986).

3. Bank's lien on tools on repossessed tools as possessory or nonpossessory security interest examined. In re Sanders, 61 B.R. 381, 384 (1986).

4. Lender's breach of duty to borrower by allowing indiscriminate breeding of purebred cattle was proximate cause of damages. In re Krug, 189 B.R. 948, 960 (1995).

1. No error in judge's conclusion that sale of collateral was made in commercially reasonable manner where defendant sold stock that allegedly could have been sold at a higher value. Ross v. Rothstein, 92 F. Supp. 3d 1041, 1062 (D. Kan. 2015).

2. Vehicle owner could not proceed with claim for improper repossession based upon alleged breach of the peace because the company and the operator were not secured parties; owner and operator repossessed vehicle at the request of the bank that secured the loan for the vehicle. Thomas Cnty. Sheriff's Dep't, 535 F. Supp. 3d 1087 (D. Kan. 2021).