MEMORANDUM AND ORDER
J. THOMAS MARTEN, JUDGE
These consolidated bankruptcy appeals involve a priority dispute between two creditor groups, arising from various debts and obligations of the Brooke Corporation group affiliated with Robert D. Orr. Appellants Southern Fidelity Managing Agency, Northern Capital, and Security First Insurance Holdings (along with the Bank of Kansas (BoK) entered into participation agreements executed in March of 2008 with Brooke Capital Advisors (BCA), in connection with BCA’s earlier loan of some $12.38 million to another Brooke entity, Brooke Capital Advisors (BCC), which did business as Aleritas Capital Corporation. Appellee Citizens Bank & Trust Company separately loaned some $9 million to BCC. Both groups claim an interest in the proceeds from the sale of stock in First Life America Corporation (FLAC), another Brooke-related entity.
In its Order Determining Parties’ Entitlement to Proceeds of FLAC Stock (Dkt. 2), the bankruptcy court rejected Citizens’ argument that BCA had not in fact extended any loan to BCC. Despite the failure to fully document the transaction, the bankruptcy court concluded that BCA had entered into a Commerical Loan Agreement, which “documented a valid debt ... in the approximate amount of $12 million.” (Id. at 7).
The bankruptcy court made extensive factual findings as to both the Participation Agreements entered into between BCA and the Appellants and Bank of Kansas (id. at 7-13), as well as the the workout negotiations between Citizens, BCC, and BCA which occurred in the Spring of 2008. (Id. at 13-22). These general factual findings are not challenged in detail in the present appeal, and the court adopts and incorporates these findings here. Ultimately, the Brooke entities collapsed during the national financial crisis in 2008, and BCC filed for bankruptcy on October 28, 2008.
In its conclusions of law, the bankruptcy court first determined that BCA had a valid security interest in the FLAC stock, which had been pledged by BCC as security for the $12 million loan. (Id. at 26-27). This lien was a “first lien” in the FLAC stock, in contrast to Citizens’ “second lien.” (Id. at 28).
However, the court held, Citizens’ second lien in the stock was superior to that of BCA, in light of the Payment Agreement entered into by Citizens, BCC, and BCA during the workout negotiations. (Id. at 28-30). Under the Payment Agreement, BCA agreed to subordinate its otherwise superior interest in the FLAC stock.
As to the defendants in the bankruptcy action, the court distinguished between the Appellants’ Participation Certificates, and the Participation Agreement between BCA and BoK. (Id. at 31-39). The former, the court held, was a true participation agreement, and thus BCA could not contractually subordinate BoK’s lien interest; BoK’s interest remained superior to that of Citizens. The court held that, in contrast, the Participation Certifications between BCA and the Appellants were not true participation agreements, and the court recharacterized these transactions as disguised loans to BCA. As a result, the court held, the Appellants “had at most unperfected security interests in the FLAC stock.” (Id. at 35). In light of this lack of perfection, the court held that the validity of BCA’s purported subordination of the Appellant’s lien interests was moot. The court held that Citizens held a superior claim to the FLAC proceeds, except for the 14.54% interest held by BoK.
On appeal, the Appellants presented several arguments. First, they contended that the bankruptcy court erred because it failed to recognize that, recharacterization or not, they held a perfected security interest in the FLAC stock by virtue of BCA’s assignment and the operation of K.S.A. § 84-9-310(c). Second, they argued that the bankruptcy court erred when it decided that BCA could agree to subordinate its first lien without their consent. Third, they argued that the court erred in recharacterizing the participation agreements, based upon insubstantial evidence and ignoring evidence showing that they did in fact face a real risk of loss in the transaction.
In its brief as appellee, Citizens argues alternatively that the Appellants have no perfected security interest because they filed no financing statement as to the FLAC stock, did not have direct possession of it themselves, and because BCC did not separately agree to a security agreement with the Appellants. (Dkt. 14, at 18-19). Alternatively, Citizens argues that as participating lenders, the Appellants had no security interest at all (Id. at 19). Citizens did not directly discuss or even mention K.S.A. 9-310(c).
The United States Magistrate Judge issued a Report and Recommendation determining that bankruptcy court erred in failing to apply Section 310(c), and that the statute served to perfect the Appellants’ security interest in the FLAC stock. The Report rejected Citizens’ argument that the Appellants held only a security interest in a security interest. It found that the Appellants had received a valid assignment of BCA’s first, perfected lien interest. BCA’s lien interest arose directly from the Commercial Loan Agreement between BCC and BCA, which expressly permitted assignment of the security interest.
[A] review of the Participation Certificates shows that they provide that a security interest in the “Property” that was assigned and sold to Appellants. The Certificates describe “Property” as including a “Pledge of 100% stock of FLAC.” The bankruptcy court’s recharacterization of the Participation Certificates from true participation interests to loans does not change or render invalid these provisions of the Participation Certificates.
Because BCA assigned its perfected security interest in the FLAC stock to Appellants under the Participation Certificates, under K.S.A. 84-9-310(c) Appellants were not required to file to continue the perfected status of the security interest against creditors of and transferees from BCC (the original debtor). The recharacterization of Appellants’ Participation Certificates as loans by the bankruptcy court does not make the Kansas statute governing the assignment of perfected security interests inapplicable.
As a result, under Kansas law, Appellants did not need to take additional steps to continue the already perfected security interest in the FLAC stock assigned to them by BCA, and they would have superior priority to the proceeds of the sale of the FLAC stock over that of Citizens Bank and similar to that of Bank of Kansas, whom the bankruptcy ...