Paddock, LLC v. Bennett (In re Bennett), 917 F.3d 676 (8th Cir. 2019) –

A creditor holding a security interest in a manufactured home contended that its claim was secured only by real property that was the debtors’ principal residence. Consequently, it objected to a chapter 13 debtors’ plan on the grounds that it improperly modified the creditor’s claim. The bankruptcy court overruled the objection, the Bankruptcy Appellate Panel (BAP) affirmed, and the creditor appealed to the Eighth Circuit.

The creditor installed, rented and sold manufactured homes in a planned community that it owned. The debtors initially rented and then purchased a home, with the purchase financed by the creditor. The parties agreed that the loan was secured only by the manufactured home. At the time of the sale the debtors also entered into a 990-year ground lease for the lot under the home. The creditor paid real property taxes on the lot and the debtors paid personal property taxes on the home.

After the debtors filed bankruptcy, they proposed a plan that treated the creditor’s loan as partly secured (i.e. to the extent of the value of the collateral) and partly unsecured (i.e. to the extent of the deficiency). The creditor objected, arguing that it was entitled to the protection of section 1322(b)(2) of the Bankruptcy Code – which provides that a plan may not modify the rights of a holder of a claim “secured only by a security interest in real property that is the debtor’s principal residence.”

The bankruptcy court concluded that under state law the home was personal, not real property. So, it overruled the creditor’s objection and confirmed the plan. On appeal the BAP reviewed for clear error and affirmed. So, the creditor appealed to the Eighth Circuit.

The Circuit Court reviewed the bankruptcy decision independently of the BAP. It characterized the question before the court as whether the bankruptcy court’s factual findings met the state law test for fixtures. It viewed this as a mixed question of law and fact that was primarily factual. So, it joined the BAP in reviewing the bankruptcy court decision for clear error.

In deciding whether the manufactured home was real or personal property, the court noted that generally property rights in assets of a bankruptcy estate are determined under state law. In this case under applicable state common law personal property is a fixture, and thus real property, when:

1. it is actually annexed to the realty, or to something appurtenant thereto;
2. it is put to the same use as the realty with which it is connected; and
3. the party making the annexation intends to make a permanent accession to the freehold.

This is a very typical test for fixtures. And is also typically the case, the court found that the intention of the annexing party was the controlling consideration.

The court noted that the bankruptcy court specifically found that the method of attachment did not indicate an intent to make the home a permanent accession. Similarly, the bankruptcy court found that the ground lease did not clearly establish the requisite intent. The majority of the Circuit Court concluded that the findings were not clearly erroneous.

The bankruptcy court cited testimony by the debtor that based on his inspection: “the home was placed on pier pads and concrete blocks, not a concrete foundation.” In contrast the creditor’s witness stated that there was a full concrete foundation based on other nearby homes. The creditor’s witness also testified that moving the home from the foundation would damage both the home and the lot. After evaluating the testimony, the bankruptcy court found the debtor to be more credible.

The creditor challenged the bankruptcy court’s findings, but the Circuit Court reiterated that the bankruptcy court concluded the home was more like a structure on blocks than one deeply embedded in the ground – which meant that it was not a fixture.

The creditor also argued that the ground lease stated that the home was “permanently affixed,” had “permanent footings,” and would be “installed as a permanent improvement in fixture.” However, the court focused on a provision in the lease that allowed removal of the home from the lot. Similarly, the creditor pointed to the 990-year lease term, but the court noted that the lease allowed termination on 60 days’ notice.

Accordingly, the Circuit Court concluded that it was not clearly erroneous for the bankruptcy court to find that nothing in the record showed the creditor’s intent to make the manufactured home a fixture, and thus it was not real property.

However, the decision was not unanimous. The dissenting opinion presented a different view of the facts. For example, it noted that “lease” was not a correct label since the conveyance was in the nature of a fee simple absolute ownership in the lot subject to a condition subsequent. Similarly, it took issue with the suggestion that “piers and blocks” did not form a solid foundation. Furthermore, the testimony of the creditor’s witness that (a) moving the home would damage the home and damage or destroy the foundation, (b) it cannot be moved except by a “house mover,” and (c) no one had ever moved a home from the list community was unchallenged.

The dissent concluded that the majority identified the correct test but misapplied it, giving too much deference to the bankruptcy court and its “clearly erroneous factual conclusions.” Unfortunately for the creditor, the dissenter was not able to persuade the other judges.

Some states have resolved the uncertainty created by the ambiguous status of manufactured homes by enacting a statute with a title certificate procedure. For example, a manufactured home may begin as personal property, but the parties have an option to convert it to real property by filing appropriate documentation. This seems preferable to trying to predict how a court will interpret an amorphous set of facts in applying a common law standard.

Vicki R Harding, Esq.