Perfecting Manufactured Home Liens: Variations on a Theme

Kinzalow v. Clayton Bank & Trust (In re Value Investment Properties, LLC), 481 B.R. 403 (Bankr. E.D. Tenn. 2012)

Determining the priority of liens in manufactured homes owned by the debtor raised the standard question of how to classify the collateral, and thus the proper method of perfection.  In particular, should a deed of trust that served as a fixture filing trump a state UCC financing statement?

The debtor, Value Investment Properties, LLC, owned a manufactured home park.  It offered vacant lots for rent to tenants who owned their own manufactured home, and also made available manufactured homes that it owned for lease or for purchase by cash or installment sales contract.

The principals of the debtor, who were the plaintiffs in this case, sold their interest in the company.  The sale was secured by a recorded deed of trust given by the company that granted a security interest in real property, fixtures and personal property.  The deed of trust served as a fixture filing under the Uniform Commercial Code (UCC), but the sellers did not file a UCC financing statement with the secretary of state, nor did they note their liens on any of the certificates of title for the manufactured homes owned by the debtor.

Value Investment subsequently conveyed its manufactured homes to Riverglen Homes, LLC (a co-debtor that was substantively consolidated with Value Investment so that they were effectively treated as a single debtor).  Riverglen granted its bank a security interest in both the manufactured homes it owned and the contractual rights arising from sales of homes to third party purchasers.  The bank filed a UCC financing statement with the secretary of state and noted its liens on certificates of title to the homes.

The manufactured home purchasers, who were to receive title within 30 days of their last installment payment, did not purchase the land; although prior to payment in full, the sales contracts restricted movement of the manufactured homes.

The manufactured homes were required to be installed in a particular manner by state law.  The cost of removing a manufactured home and reinstalling it at a new location was somewhere around 10% of the purchase price.  The homes generally could be moved with about three to five hours of labor.

As an initial point, the court noted that the method of perfection was determined by the character of the property at the time the security interest attached.  The bank argued that the manufacture homes were not fixtures, but rather inventory within the meaning of the UCC, which meant that a lien could be perfected only by filing a UCC financing statement with the secretary of state.  Alternatively, the bank argued that the homes were subject to the state motor vehicle title and registration law, so that notation on the certificate of title was the only means for perfecting.

Since the only issue before the court was the relative priority of the parties’ liens, the court concluded that a threshold question was whether the manufactured homes were fixtures, because if not, the bank necessarily won.

The selling owners contended that the manufactured homes constituted fixtures under common law.  The court questioned whether common law was still applicable given extensive revisions to the state motor vehicle title and registration law (including a definition of “manufactured homes” and a statutory mechanism to surrender a certificate of title), but decided that the homes would not constitute fixtures even if common law was applicable.

Under state common law, the question of whether something is a fixture turned on whether the item is so attached to the real estate that, based on the intention of the parties and the uses, it is clear it was to be permanently affixed, or a removal would cause serious injury to the real estate.  In this case, it was clear that the owners all hoped that every manufactured home owned by the debtor would be sold, and thus did not intend them to be permanently affixed.  Further, it was feasible to move the homes given the costs and effort required, and there was no evidence that removal would cause substantial harm to the real estate.

Thus, the homes were not fixtures, and recordation of a fixture filing did not perfect the plaintiff’s interest.  Further, the court agreed with the bank that the homes constituted inventory under the UCC, and thus that a state UCC filing was required for perfection.  Consequently, only the bank liens were perfected.

Perfecting liens on manufactured homes can be difficult because of the uncertainty about their status and the proper procedure for perfecting: is it filing a fixture filing? filing a state UCC financing statement? noting the lien on a certificate of title? … or does it all depend (and if so, on what)?  To make matters worse, as discussed in a prior blog (Strong Arm Powers Round 4: Manufactured Home Liens), perfecting a lien on a manufactured home can involve detailed technical requirements that are not always self evident.  The best course of action seems to be to perfect early and often, and to make sure that all “i”s are dotted and all “t”s crossed.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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