K.S.A. § 84-9-107 (2026)

Control of letter-of-credit right

KANSAS COMMENT, 1996

This section, which does not vary from the 1995 Official Text, defines the important term "purchase money security interest." This definition is important because, under Article 9, a purchase money security interest has special priority over earlier-filed financing statements which can cover the collateral under an after-acquired property clause or a later-executed security agreement. See especially 84-9-312(3) for priorities given to purchase money security interests in inventory and 84-9-312(4) other collateral, usually equipment. Other examples of the priority given to purchase money security interests include crop production loans under 84-9-312(2), statutory liens under 84-9-310, fixtures under 84-9-313, accessions under 84-9-314, and commingled goods under 84-9-315. The purchase money claimant is given superpriority status even though its interest arises later because the debtor would never have acquired the collateral were it not for the purchase money credit extended.

This section sets forth two types of purchase money security interests. Under subsection (a), the seller who retains a security interest in the goods as security for their price has a purchase money interest. An assignee of the purchase money secured seller would have the same interest. Under subsection (b), purchase money status also belongs to a direct third-party financier who advances value or incurs an obligation to enable the debtor to purchase the collateral from a seller. Often the big problem is one of proof that the loan was for the purpose of acquiring that collateral, and was in fact so used. A seller (or the seller's assignee) can almost always trace the source of its security interest as purchase money. This is not so easy for the direct third-party lender, who must show that the loan proceeds were in fact used to purchase the collateral. The laying of a paper trail becomes imperative, and can often be arranged by a check payable to the seller and an agreement that the check must be used for that purpose.

For a case illustrating an effective way for a non-seller financier to guarantee it has a purchase money security interest and that the debtor buyer uses the proceeds as agreed, see Kansas State Bank v. Overseas Motosport, Inc., 222 K. 26, 563 P.2d 414 (1977), further described in Kansas Comment 1996 to 84-9-203.

On the question of whether purchase money priority should be given to a lender where the loan proceeds were used by the debtor to pay off an open account, see North Platte State Bank v. Production Credit Association, 200 N.W.2d 1 (Neb. 1972). The test should be whether the availability of a direct loan take-out was a factor in negotiating the original sale on open account. Another issue which has arisen is whether purchase money status is lost if the creditor later extends more credit (non-purchase money) under a future advance clause. In general, the courts are holding that purchase money status is lost when the future advance is made because the collateral then purports to secure debt other than its own price. See, e.g., In re Manuel, 507 F.2d 990 (5th Cir. 1975) (case involving loss of automatic perfection of purchase money security interest in consumer goods). The loss of purchase money status can hurt the creditor in a priority battle under 84-9-312, and it can lead to a wipeout of a security interest in certain exempt consumer goods in bankruptcy. See 11 U.S.C. § 522(f).

Revisor's Note:

* Reference to 84-5-114(a) should be to 84-5-114(c).

Former section 84-9-107 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

"Floor plan financing," Charles H. Oldfather, 14 K.L.R. 571, 572, 581, 582, 588 (1966).

"Official UCC Comment" and definition of "purchase money security interest" in footnotes to "Some Secured Transactions With the Farmer," Van Smith, 35 J.B.A.K. 299, 301 (1966).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Credit company's perfected purchase money security interest in vehicles has priority over bank's security interest; vehicles not sold to a buyer in ordinary course of business. First National Bank and Trust Co. v. Ford Motor Credit Co., 231 Kan. 431, 435, 646 P.2d 1057 (1982).

2. In lien avoidance case, a lien is purchase money until purchase price paid out applying first-in, first-out payment method. In Re Gibson, 16 B.R. 257, 258, 269 (1981).

3. Prior perfected security interest in modular home takes precedence over real estate mortgage; no need to re-perfect through a fixture filing when home was attached to ground. Prairie State Bank v. Superior Housing, Inc., 30 Kan. App. 2d 273, 40 P.3d 336 (2002).

4. Mentioned; purchase money character of the obligation was not lost through refinancings. In re Jackson, 358 B.R. 412, 417 (2007).