The following is an update analyzing a recent case of interest:
An Indiana bankruptcy court has held that a purchase money security interest in windows, siding and gutters installed in a Chapter 13 debtor’s home was subject to lien-stripping because it was junior to the first mortgage loan. This was held to be true notwithstanding the fact that the fixtures were purchased by the debtor together with a non-debtor. The case is In re Pierce, 2020 WL 6701339 (Bankr. S.D. Ind. November 12, 2020). A copy of the opinion may be found here.
Sally Pierce resides in Indiana and owns her home in Henry County, Indiana. Sally and her boyfriend Willie Tarver obtained a $40,240 loan which was secured by a first mortgage on the home, recorded on July 16, 2013. At about the same time, Sally and Willie purchased windows, siding and gutters from Unique Home Solutions (the “Purchased Goods). Unique installed them in Sally’s home. The purchase was financed by Time Investment Co.
The Time Investment finance documents included a “Revolving Credit Agreement” which granted a security interest in the Purchased Goods. Sally and Willie signed the Credit Agreement on July 3. Sally signed a certificate of completion on July 30, 2013, approving the installation. Time filed a UCC-1 financing statement on April 24, 2014, but did not record a fixture filing in Henry County until November 26, 2018. According to court documents, Sally and Willie defaulted on the Time Investment obligation in May, 2019, and Sally filed a Chapter 13 bankruptcy petition in the Southern District of Indiana on July 19, 2019.
Time filed a proof of secured claim. Sally filed an adversary proceeding seeking a determination that Time was an unsecured creditor. Sally alleged that her home was overencumbered by the first mortgage, such that Time’s lien on the Purchased Goods, which were part of her home, could be stripped as wholly unsecured.
Time filed a motion for summary judgment. For purposes of the motion Time did not contest that there was no equity in the home over and above the first mortgage. It instead relied on section 506(d) of the Bankruptcy Code and section 9-309(1) of the Uniform Commercial Code in arguing that regardless of the value of the home its lien could not be stripped. The Bankruptcy Court denied the motion for summary judgment. Court documents indicate that a settlement followed.
Time argued that Bankruptcy Code section 506(d) does not extend so far as to allow a Chapter 13 debtor to strip a lien from the property of a non-debtor. Willie, a non-debtor, bought the Purchased Goods together with Sally. The Court did not address that bankruptcy law issue, because it did not agree that Willie was a co-owner of the Purchased Goods, once they were installed. The Court stated that Willie’s status as a co-owner was “not supported by Indiana’s law regarding fixtures.” The opinion explains that Indiana applies a three part test to determine whether personal property becomes a fixture: “(1) Was the item actually or constructively annexed to real estate? (2) Was the item adapted to the use of the realty? (3) Did the person with an ownership interest in the personal property intend that it become a permanent accession to the real property?” The Court observed that intent was the most important factor.
Willie obviously knew that the goods which he and Sally purchased would be permanently installed in Sally’s home. The Court concluded that “[t]herefore, once Unique installed the Purchased Goods, they then became an unremovable part of Debtor’s Home and [Willie] lost any ownership interest therein. This case is analogous to and controlled by holdings in Indiana and around the country that when a tenant affixes the tenant’s personal property to a landlord’s real property, the personal property is converted into a fixture and the tenant loses any ownership interest in the affixed property.”
Time’s other argument was based on the Uniform Commercial Code. Time claimed, and the opinion assumes, that the windows, sidings and gutters were “consumer goods” under the Uniform Commercial Code. UCC section 3-309 provides that a purchase money security interest in consumer goods is automatically perfected when it attaches. Time argued that its security interest attached when Sally and Willie signed the Credit Agreement on July 3, prior to the recordation of the mortgage on July 16. The opinion does not provide any facts as to exactly when the Purchased Goods were delivered or installed, except to note that the Certificate of Completion was signed on July 30.
The Court concluded that Time’s security interest did not attach on July 3, because of the following language in the Credit Agreement: “If Credit is approved, the undersigned Buyer(s) hereby agree to be bound by the terms of the Revolving Creditor Agreement on the reverse side.” The Court stated that Time had not approved the credit application of Sally and Willie until July 31 at the earliest.
Finally, the Court discussed UCC section 9-334, which governs the priority between a mortgage creditor and the holder of a purchase money security interest in goods which become fixtures. As to fixtures which are not readily removable, the purchase money security interest will be senior to an existing mortgage only if it is “perfected by a fixture filing before the goods become fixtures or within twenty (20) days thereafter.” Time did not file a financing statement with the Indiana Secretary of State until almost nine months after the Purchased Goods were installed, and did not record its fixture filing in Henry County until five years later.
The Court avoided addressing Time’s argument that a lien can’t be stripped from the property of a non-debtor, by assuming that Willie, by permitting the co-owned Purchased Goods to be installed in Sally’s home, intended to transfer ownership of his interest in those fixtures to Sally. In this case Willie was not called upon to testify as to his intent. One wonders, however, how he might have testified in a dispute with Sally outside of the bankruptcy arena.
As a general rule, UCC section 9-334(d) requires that a fixture filing be recorded in the real estate records in order to perfect a security interest in goods which will be senior to an existing mortgage, and then only if the fixture filing is recorded within 20 days after the goods become fixtures. Subsection 9-334(e)(2) grants senior status to a fixtures lien perfected by any method permitted under Article 9 (including automatic perfection upon attachment) but only as to fixtures that are “readily removable” such as “factory or office machines” or “replacement of domestic appliances that are consumer goods.” Windows, siding and gutters don’t fit that description.
The numbers involved in the case, uncovered by mining the docket, are interesting. The first mortgage, recorded on July 13, 2013 was a bank loan in the amount of $40,240. The bank filed a proof of claim in the amount of $40,224.54. In Sally’s bankruptcy schedules filed six years later, the home was valued at $34,000, backed up by an exhibit showing that it was assessed at $33,000. The opinion does not tell us the amount of the Time Investment claim, but Time’s proof of claim shows that Sally and Willie paid $3,000 down for the Purchased Goods, and financed the balance of $37,305 at 12.99% interest. The proof of claim shows a series of payments in varying amounts over five years, which ceased altogether shortly before the petition date. The amount charged off by Time in June, 2019, was $33,781.58. Taking the valuation as close to truth, Sally and Willie owed more on the petition date for the windows, siding and gutters than the house was worth.
Depending on the timing, it would have been possible for Time to have recorded its fixture filing after the mortgage recorded, and for its lien on fixtures to still be superior to the mortgage because of the twenty day grace period. In that case it might have been the bank’s first mortgage that was rendered wholly unsecured.
The Commercial Finance Newsletter is written by an ad hoc group of the California Lawyers Association’s (CLA) Business Law Section. These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. The opinions expressed herein are solely those of the author. Thomson Reuters holds the copyright to these materials and has permitted the Commercial Transactions Committee of Business Law Section of the California Lawyers Association to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.
This ebulletin was prepared by Walter K. Oetzell, Walter K. Oetzell, APC, email@example.com.