#2332 signed 7-9-97
CAROL JEAN PFANNENSTIEL,
CASE NO. 97-40043-13
This matter is before the Court on the objection of Midwest Energy, Inc. (Midwest), to confirmation of the debtor's proposed chapter 13 plan of reorganization. The debtor appears by counsel Tom R. Barnes II. Midwest appears by counsel Joel D. McMullen and Jeff Lee McVey. The Court has reviewed the relevant pleadings and heard arguments, and is now ready to rule.
Late in 1994, the debtor signed a promissory note in favor of Midwest and granted it a security interest in some heating and air conditioning equipment. Midwest filed a financing statement, and the perfection of its security interest as of that time has not been challenged. In September 1996, Midwest obtained a default judgment against the debtor for the balance owed on the note. The judgment did not mention Midwest's security interest. In January 1997, the debtor filed a chapter 13 bankruptcy petition and a proposed plan which would treat Midwest as a general unsecured creditor. Midwest objected that it has a properly perfected security interest. The debtor contends Midwest is now barred from asserting the security interest since it failed to do so when it obtained the judgment against her.
District Judges Theis and Kelly have issued conflicting decisions about a creditor's ability under Kansas law to continue to assert a perfected security interest under Article 9 of the Uniform Commercial Code after it has obtained a personal judgment against its debtor without foreclosing its security interest. Bank of Oklahoma v. Fidelity State Bank, 623 F.Supp. 479 (D.Kan. 1985) (Kelly, J.) (creditor can assert); Liberty Loan Corp. v. Wallace (In re Wilson), 390 F.Supp. 1121 (D.Kan. 1975) (Theis, J.) (creditor cannot assert). In a case involving mechanic's liens, which are not covered by the UCC, the Kansas Supreme Court has since indicated that Judge Theis correctly interpreted Kansas law not governed by the UCC to forbid splitting a cause of action in this way. Home State Bank v. P.B. Hoidale Co., 239 Kan. 165, 167-69 (1986). That court explained, "The rule against the splitting of a cause of action is based upon varied and justifiable concerns: preserving judicial economy and convenience; avoiding repetitive or fragmented litigation; and protecting a party from multiple harassment and expense over the same claim." Id. at 169.
However, for cases that are governed by Article 9 of the UCC, like the one before this Court, K.S.A. 84-9-501(5) provides:
When a secured party has reduced his claim to judgment the lien of any levy which
may be made upon his collateral by virtue of any execution based upon the judgment shall
relate back to the date of the perfection of the security interest in such collateral. A
judicial sale, pursuant to such execution, is a foreclosure of the security interest by judicial
procedure within the meaning of this section, and the secured party may purchase at the
sale and thereafter hold the collateral free of any other requirements of this article.
This statute indicates that, after a personal judgment has been entered on its claim, Midwest's security interest can be enforced using the mechanism of execution, the same mechanism which would allow a previously unsecured creditor to seize the debtor's property. The debtor is subjected to no more litigation as a result of Midwest's enforcement of its security interest this way than she would have been if Midwest had not had a security interest. The statute also allows Midwest to retain its pre-judgment priority over other creditors the debtor might have. At least where 84-9-501(5) applies, the Court concludes a creditor does not lose any of the advantages of its security interest by obtaining a personal judgment against its debtor without enforcing its security interest at the same time. Consequently, Midwest is still a secured creditor and must be treated as one in the debtor's chapter 13 plan.
Midwest's objection to confirmation is hereby sustained.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of July, 1997.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE