How do lenders identify fixtures and perfect a security interest in them?

Article 9 of the Uniform Commercial Code governs a lender’s security interest in personal property. A mortgage is a lender’s security interest in land, nothing like an Article 9 filing. Nobody confuses those two types of liens. The distinction between personal property and land can sometimes blur the line. Fixtures blur the line. A fixture is personal property that is attached so closely to land that it becomes part of the land. If an Article 9 personal property lender forecloses on fixtures (treating them as personal property), and a mortgage lender forecloses on the land, only one lender can win. A lender who spots fixtures and files right stays perfected if the borrower defaults or fights with creditors.

At one extreme is personal property that merges into real estate. Most obvious examples are lumber that becomes framing, drywall that gets hung, wiring that gets snaked, and materials that turn into concrete on site. These are not necessarily fixtures when bought and delivered. Lumber or drywall sitting outside a building on the ground is still personal property.

At the other extreme, there are items that are clearly not fixtures. Computers are one example, as is furniture and goods that are easily moved. In the middle, there are items that get more blurry. A furnace or boiler may be considered a fixture when installed. It is part of the mechanical system. Yet it is removable. A used furnace can be sold as a unit on its own, as can a used boiler. Is a furnace or boiler a fixture? The answer is unclear. It depends on the facts.

Whether the Grain Bin Was a Fixture

The Minnesota Court of Appeals in Lighthouse Management Inc. v. Oberg Family Farms addressed a dispute between two creditors over a grain bin. One creditor was a mortgage holder who claimed the grain bin was a fixture. The other creditor had an Article 9 security interest in the farmer’s equipment. That creditor claimed the grain bin as part of the farm’s equipment. The creditor argued the grain bin was not a fixture so Article 9 trumped. The grain bin came in used. It was dismantled in Iowa and shipped to northern Minnesota in eleven semi loads. It was enormous. It stored over 800,000 bushels. It was 132 feet across. Reportedly, it was bolted to the foundation with a thousand bolts. The rebuild took thirty subcontractors and suppliers and more than a month. This was no simple job.

The court held there is no single answer to whether a piece of equipment is a fixture. The court simply could not give a general rule. That is frustrating for lenders who want more certainty in order to reduce risk. The court said the answer is a fact issue for a trial by jury or judge. If there is a trial on this question, the judge will be asked to follow a list of four factors. The four factors are removal, damage, value, and intent. Does the removal leave the real estate substantially worse off? Can the item be removed without breaking it or causing damage? Does the item have independent value after removal? What was the intent of the parties? These four factors are combined for an answer in the end.

To get a fixture lien: All it takes is a security agreement in which the borrower agrees to grant a security interest in fixtures. That can be made part of the mortgage. Include in the security agreement language making all fixtures part of the deal. Any fixtures on the property or fixtures that get installed later count. Next, the fixture financing statement or the mortgage needs to be recorded at the county recorder. The debtor’s name and secured party’s name are on the mortgage along with a property description. That gives notice to the world.

Get a Lien on Both Fixtures and Personal Property

For lenders, if there is any doubt, get a lien on both fixtures and personal property. Most mortgages on businesses do both. That way the creditor has two possible sources of perfection. If the bin is not a fixture, the personal property filing still has a chance. The mortgage in county land records is the place for the fixtures and land. The personal property lien is filed separately with the secretary of state. That is the normal practice. When a creditor gets a mortgage or a security interest, a filing is needed for perfection. Another part of a lender’s job: check the title for liens. The order of filing is generally a first in time, first in line rule, with the first to file or record getting the priority.

A furnace or grain bin can be a fixture. The line is unclear so file in both the secretary of state’s office for personal property, and the recorder’s office for land.