Enforcing commercial loan defaults sometimes involves the foreclosure on, or repossession of, loan collateral called a “fixture,” which is a hybrid of real and personal property. Given their nature, fixtures can be the subject of disputes between mortgagees and other creditors who argue about who has priority over the fixture or whether there is a security interest in the fixture to begin with.
UCC. Indiana’s Uniform Commercial Code, which deals with, among other things, secured transactions (in Article 9.1), talks in detail about fixtures. Curiously, the UCC does not provide a practical definition of a fixture. I.C. § 26-1-9.1-102(41) says that a fixture means “goods that have become so related to particular real property that an interest in them arises under real property law.” Not helpful.
Common law definition. Indiana case law defines fixtures, and the best discussion comes from the Indiana Supreme Court in Gill v. Evansville Sheet Metal Works, 970 N.E.2d 633 (Ind. 2012). Citing to older Indiana cases, the Court stated:
A fixture is a former chattel or piece of personal property that has become a part of real estate by reason of attachment thereto. . . . As a general matter, personal property becomes a fixture if the following are established: (1) either actual or constructive annexation of the article to the real property; (2) adaptation of the article to the use of the real property in general or to the part of the real property to which the article is connected; and (3) an intent by the annexing party to make the article a permanent accession to the real property.
In an earlier case, Ind. Dep’t of Natural Res. v. Lick Fork Marina, 820 N.E.2d 152 (Ind. Ct. App. 2005), the Court of Appeals referred to Black’s Law Dictionary, noting that a fixture is “personal property that is attached to land or a building and that is regarded as an irremovable part of the real property.”
A transformed good. Here are some examples of fixtures: underground storage tanks, landscaping, furnaces, sprinkler systems and water softeners. One specific illustration comes from Conseco Finance v. Old National Bank, 754 N.E.2d 997 (Ind. Ct. App. 2001) dealing with security interests in manufactured homes:
When purchased from a retail establishment, the manufactured home is a “good,” and clearly moveable; but once placed on real estate, attached to a foundation, and connected to utilities, it becomes a fixture.
A fixture starts out as personal property but converts into a fixture when it becomes attached to the real estate. This is one of the reasons why there can be questions surrounding whether a mortgage, as opposed to a UCC financing statement, creates a lien on a fixture.
Generalities. A creditor that obtains a security interest in a fixture should be mindful of competing claims from other secured creditors, such as asset-based lenders, which finance with goods and personal property, and mortgagees, which loan on real estate. (A creditor can obtain a purchase money security interest in a fixture.) To perfect a security interest in fixtures, we recommend filing two financing statements: (i) one with the Secretary of State of the state in which the party assigning a security interest has been organized, and (ii) a “fixture filing” with the pertinent county recorder’s office. Although a mortgage can double as a fixture filing if it includes the statutory elements of a fixture filing, lender’s counsel usually file a UCC financing statement too. Here is a short list of the more important provisions of Indiana’s UCC, Article 9.1, that deal with fixtures:
• Priority: I.C. § 26-1-9.1-334
• Perfecting, generally: I.C. § 26-1-9.1-310 and 301(3)(a)
• Perfection, where: I.C. § 9-1-9.1-501
• Enforcement: I.C. § 9-1-9.1-604
For more on security interests and related issues, click on the UCC/Security Interests category that is along the right side of my home page. For more on how to finance based on fixtures or enforce loans with fixtures as collateral, please contact me. Thanks to my colleague Sierra Bunnell for her input into this post.