Assignments 20 and 33 Land-Related Interests Priority (Land Claimants vs. Art. 9 Secured Parties in Fixtures, Timber, or Crops) Reference: Understanding Secured Transactions Chapter 15 Problem 20.1(a): Proposed Collateral is Debtor s 1/3 interest in Devil s Valley (160 acres of land). Lender should: A. Have Debtor sign a security agreement covering the collateral, file UCC-1 B. Have Debtor sign mortgage, record it in land records Have Debtor sign a secur... Have Debtor sign mortga... Recording/Filing Systems LAND GOODS If Debtor owns a 1/3 interest in the land as a tenant in common, that s real estate, and Art. 9 doesn t apply to the transaction [ 9-109(d)(11)] Lender must have Debtor sign a mortgage, and record that mortgage in the land records But if the land is owned by a trust, LLC, or partnership, and the Debtor owns a 1/3 share of that entity, the Debtor s interest is personal property (a general intangible ), and Article 9 applies! Lender must have Debtor sign a security agreement covering that 1/3 share interest, and file UCC-1 1
Problem: Debtor is a Builder. Here s the Bank s Collateral Land-Related Collateral Suppose Bank holds a SI in the present and after-acquired inventory of ABC Builders ABC Builders inventory includes lumber, other building materials (to be used in building homes) Before being used to build homes, the materials are clearly goods, but what about once they are used? Three Possibilities Suppose that ABC Builders uses some of its inventory (which is subject to Bank s SI) as follows: 1) It uses 1000 pieces of lumber to frame the interior walls in a home it is building 2) It uses 100 pieces of lumber and builds a swingset, set in concrete in the home s backyard 3) It uses 1 piece of lumber to make a nameplate ( the Martins ) to hang on the home s front door 9-334. Priority of Security Interests in Fixtures and Crops. (a) [Security interest in fixtures under this article.] A security interest under this article may be created in goods that are fixtures or may continue in goods that become fixtures. A security interest does not exist under this article in ordinary building materials incorporated into an improvement on land. (b) [Security interest in fixtures under real-property law.] This article does not prevent creation of an encumbrance upon fixtures under real property law. (c) [General rule: subordination of security interest in fixtures.] In cases not governed by subsections (d) through (h), a security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor. 2
Recording/Filing Systems LAND FIXTURES/ TIMBER FIXTURES/ TIMBER GOODS Three Classifications Type 1: Bank no longer has a SI in the wood ( ordinary building materials ) once it is used to frame in the home [ 9-334(a)] (identity is lost) Type 2: Swingset becomes part of the land (a fixture ), but doesn t lose its identity (it could be disassembled, removed and transferred) Swingset is a fixture if it is so related to particular real property that an interest in [it] arises under real property law [ 9-102(a)(41)] Type 3: Nameplate is likely still goods (not intended to be fixture, minimal/no attachment) Fixture Definition Whether an item is a fixture is a question of state law other than Article 9 [ 9-102(a)(41)] Case law: this is a function of three questions To what degree is item annexed/attached to land? To what degree is the item adapted to the particular characteristics of the land? Did the annexor intend to permanently attach the item to the land? If the goods are fixtures, someone with a SI in the goods must make a fixture filing [ 9-102(a)(40)] in the land records Fixture filing is UCC-1 covering goods that (a) states that goods are/are to become fixtures, (b) states it is to be filed in land records, (c) describes the land, and (d) identifies record owner of land Fixture filing is indexed in land records (to be searchable by buyers/mortgagees of land) Fixture filing alerts possible land buyers/mortgagees of a prior SI in the fixture 3
Three Classes: Implications Type 1 collateral: lender must take mortgage, record it in land records (Art. 9 does not apply) Type 2 collateral (fixtures): lender can take an Article 9 SI in fixtures, perfect by making a fixture filing in land records [ 9-102(a)(40)] Type 3: still goods, not fixtures at all, lender must take an Article 9 SI and perfect by filing UCC-1 in regular UCC records Fixture Priority The existence of the concept of a fixture create a dual-system problem System 1: Article 9 allows creation of a SI in a good that is a fixture or that could become one System 2: But, once a good becomes a fixture (and thus part of the land), it also becomes covered by any mortgage on the land Who has priority: the Article 9 secured party, or the real estate encumbrancer? Article 9 Fixture Secured Party v. Land Mortgagee: Priority General rule: creditor with a mortgage or lien on the land (an encumbrancer ) has priority over a creditor holding a conflicting Article 9 SI in a fixture attached to that land [ 9-334(c)], unless one of 9-334 s exceptions applies to give priority to the Article 9 fixture secured party Article 9 Fixture Secured Party v. Land Mortgagee 9-334 s exceptions (cases in which Article 9 fixture secured party has priority) PMSI in fixtures, perfected by timely fixture filing [ 9-334(d)] Fixture SI perfected by a fixture filing before mortgage is recorded [ 9-334(e)(1)] Mortgagee consents [ 9-334(f)(1)] Debtor has right to remove fixture [ 9-334(f)(2)] 4
Problem 20.3 Folds Mobile Homes sells a manufactured home to Buyer on credit, takes PMSI in it Not a titled good, so Folds filed a UCC-1 filing (but not a fixture filing) Buyer placed the home on a lot that was subject to a recorded mortgage held by PSF Bank PSF Bank is now foreclosing on the land and the home, and alleges that it has priority over Folds What is the first step in analysis of this problem? First Q: is the mobile home a fixture under state law? If so, Folds has to make a fixture filing to give notice to land-related creditors (such as PSF Bank) If not, Folds has a perfected PMSI (by its UCC-1 and by automatic perfection of PMSI in consumer goods) [ 9-309(1)] If not, PSF Bank would have no perfected security interest in the home (since it didn t comply with Article 9) Second Q: priority between Folds and PSF? Problem 20.3: Which Creditor Has Priority in the Home? Folds (Article 9 Secured Party) or PSF Bank (Mortgagee)? A. PSF Bank has priority under the default rule B. Folds has priority b/c Folds took a PMSI in the home PSF Bank has priority un... Folds has priority b/c Fol.. PMSI Fixture Priority [ 9-334(d)] Creditor holding PMSI in fixtures is entitled to priority over land mortgagee if: Debtor is record owner of land/in possession of land, Interest of the mortgagee arose before the goods became fixtures, and PMSI is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter 5
Problem 20.3 If manufactured home (MH) is a fixture, PSF Bank s mortgage has priority over Folds SI in MH (no fixture filing) [ 9-334(c)] Had Folds made a fixture filing w/in 20 days after MH was affixed to the land, Folds would ve had priority under the PMSI exception [ 9-334(d)] If it had priority, Folds could ve removed the home and sold it (via Article 9 sale) following default by Buyer [ 9-604(c)] Problem 33.3 Folds took a PMSI in a manufactured home sold to Buyer, which became a fixture upon installation Folds filed a UCC-1 covering the home, but made no fixture filing 6 months later: Buyer filed for bankruptcy Question: Can Buyer s bankruptcy trustee avoid Folds SI in the manufactured home? Problem 33.3: Which Statement Is Correct? A. Folds has a properly perfected PMSI in the home and the trustee cannot avoid it B. The trustee can avoid Folds PMSI in the home b/c Folds did not make a fixture filing Folds has a properly per... The trustee can avoid Fo... Article 9 Fixture Secured Party vs. Lien Creditor/Trustee Creditor w/article 9 SI in a fixture has priority over a competing lien creditor if the fixture SI was perfected in any manner [ 9-334(e)(3)] Fixture filing not required vs. lien creditor! [Rationale: lien creditor isn t a reliance creditor] Trustee can t avoid Folds SI, because: PMSI in MH (consumer goods) was automatically perfected [ 9-309(1)], and, in any event, Folds filed proper UCC-1 covering the MH 6
Land, Timber, and Crops Bank proposes to loan $500,000 to Debtor, to be secured by a mortgage on 200 acres of land 100 acres is mature timber 70 acres is planted in corn 30 acres of Christmas trees (growing in rows) Would Bank s mortgage cover the timber? The corn? The Christmas trees? To what extent (if any) is Article 9 relevant to this transaction? A mortgage granted to Bank will cover the trees and the crops, which are part of the land But Bank cannot ignore Article 9, b/c the trees and the corn can be cut and removed from the land (and thus changed into personal property) SI can be created under Article 9 in timber to be cut and removed under a conveyance or contract for sale ; such timber is goods [ 9-102(a)(44)] SI may be created in crops ( farm products ) Bank thus must check to see if conflicting interests in the trees/corn have arisen under Article 9 system Priority: Land vs. Article 9 It is thus possible for conflicting interests in crops or timber to arise under different bodies of law E.g., Timber Associates could have taken an Article 9 SI in the timber, while at the same time, Bank might have a mortgage on the land on which those trees are growing How will such a priority conflict be resolved? Land-Related Filings For an Art. 9 SI in minerals or timber to be cut, secured party must perfect by filing UCC-1 in the recorder of deeds office [ 9-501(a)(1)(A)] (not in the secretary of state s office) Note: these filings must contain the legal description of the applicable land, so that they can be indexed (and thus be searchable) in the land records [ 9-502(b)(3)] Rationale: buyers/mortgagees of land will look to the public land records for information as to conflicting interests relative to that land 7
The Timber: Priority Priority dispute between Bank (mortgagee) and conflicting Article 9 SI in timber is governed by real estate law (recording act) Bank should search for UCC-1 timber filing in the real estate records; if there is any such filing, Bank would take subject to any prior perfected interest If there are no such filings, then Bank s recorded mortgage will give Bank priority over any later conflicting Article 9 SI in the timber The Corn (Crops): Priority Article 9 SI in crops is perfected by regular UCC-1 filing (in Secretary of State s office) [ 9-501(a)(2)] Priority rule: a perfected Article 9 SI in crops takes priority over the rights of an encumbrancer in crops (such as the holder of a mortgage) [ 9-334(i)], even if the mortgage was recorded first (timing is irrelevant) Thus, if Bank expects priority vs. the corn, it must (1) search in UCC records for prior filings against Debtor s crops and (2) file UCC-1 covering the corn crop in Secretary of State s office Are Christmas Trees Timber, or Crops? Rainier Nat l Bank v. Security State Bank (Wash. 1990) (trees on Christmas tree farm were crops ) Secured Party which had perfected Article 9 SI in all of debtor s crops took priority over prior-intime mortgage on the land 8