Real Estate Sales: Fixtures Can Be In the Eye of the Beholder (a/k/a Boilerplate Matters)

In re Trackwell, 520 B.R. 788 (Bankr. W.D. Mo. 2014) –

The successful bidder at a bankruptcy auction of a ranch claimed that a cattle chute was included in the sold assets.  The debtors disagreed.  Resolution of the dispute turned on whether the cattle chute constituted a fixture that was part of the real estate.

The particular chute in question was a “hydraulic squeeze chute.”  Cattle go into the chute and then are squeezed tight by hydraulics so that they can be inoculated or branded.  The chute was used at various locations around the ranch, and was moved about using a small trailer.  This was in contrast to a “loading chute,” which is affixed to the land.

Turning first to the plain language of the purchase agreement, the property sold was described as:  “The real estate and improvements… together with all buildings, improvements, fixtures and property attached hereto and made a part hereof owned by the Seller located in, on, attached to, or used in connection with the Property…”  The purchase agreement also specifically excluded personal property.

The debtors argued that the buyer had the burden of proof in establishing that the chute was a fixture since it was the moving party.  While acknowledging that it is generally the case that a movant has the burden of proof, the court declined to apply that rule in the context of a contract interpretation question.  In the court’s view “when interpreting a contract such as this one, the meaning should not depend on who instituted the action.”

The buyer argued that the chute was property “used in connection with” the ranch.  However, the court noted that this would include virtually everything located at the ranch, which clearly was not the intent given the exclusion of personal property.  Rather, the court concluded that an item also had to be attached to and a part of the property in order to be included in the sale.

Although state law did not provide a “definite, hard and fast rule” to determine whether an item was a fixture, there were three tests to be used as a “general guide:”

(1)  Real or constructive annexation of the articles in question to the realty;

(2)  appropriation or adaptation to the use or purpose of that part of the realty with which it is connected; [and]

(3)  the intention of the party making the annexation, to make the article a permanent accession to the freehold, this intention being inferred from the nature of the article affixed, the relation and situation of the party making the annexation, the policy of the law in relation thereto, the structure and mode of the annexation, and the purpose or use for which the annexation has been made.

With respect to annexation, the court noted that annexation can be actual or constructive.  In other words, many courts have abandoned the requirement that the item must be physically attached in order to be a fixture.  The court summarized a half dozen cases in a footnote where items were found to be fixtures, including mink pens that were regularly removed for cleaning and repair, and grain tanks that were not attached but held in place only by gravity.

However, the “highly mobile nature” of the squeeze chute led the court to the conclusion that it was not even constructively annexed to the land.  There was also no evidence that the chute was particularly adapted to this specific ranch, and could easily be used on any cattle ranch.

As to the third test, neither the debtors nor the people who sold the ranch to them considered the chute to be a fixture.  In considering the intention of the party making the annexation, the determination is to be based on what “the law deduces from all of the circumstances of the installation of the articles on the land,” as opposed to a “secret plan in the mind of the person making the annexation.”  In other words, the relevant test was the presumed objective intention of a hypothetical ordinary reasonable person, as opposed to the actual subjective intent of the debtors.  The court reviewed a series of facts and concluded this particular chute was personal property as opposed to a fixture.

The buyers’ final argument was that the chute should be included because the auctioneer represented that it was included.  The court acknowledged that a summary and bidders packet published by the auctioneer listed the hydraulic squeeze chute as property included in the sale, and the buyers asserted that several oral statements were made to that effect.  Consequently, they argued that the chute should be included regardless of whether it was part of the real estate.

However, under the applicable state parol evidence rule, if an agreement is reduced to writing and intended to be the final expression of the parties, it generally must be interpreted based solely on the terms of the agreement itself.  There are a few exceptions, such as circumstances involving an ambiguity or illegality or fraud, but otherwise a court should not consider any external evidence.

Although there is a threshold question of whether the agreement was intended to be an integrated, final statement of the parties’ agreement, in this case the purchase agreement included standard boilerplate to the effect that the agreement “constitutes the entire agreement between the parties as to the subject matter hereof and supersedes all prior understandings and agreements.  There are no representations, agreements[,] arrangements[,] or understandings oral or written between the parties, including the Broker, relating to the subject matter contained in this Agreement which is not fully expressed or referred to herein.”

The court found that the buyers were bound by this provision, and thus the parol evidence rule was applicable and precluded consideration of the auctioneer’s representations. Consequently, the court determined that the chute was not included in the assets purchased at the sale.

This case is one more example that (1) boilerplate matters, and (2) more often than not it is helpful to a buyer to make sure that a purchase agreement specifically identifies all important assets.

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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