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What Is A Fixture?

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.


The Indiana Lawyer.com: Legal Blogging

Marilyn Odendahl of The Indiana Lawyer wrote nice little piece about local law bloggers:

    Attorneys turn to blogs to market their services, find clients and express themselves

The article mentions my blog and has a couple quotes from yours truly.  As I told Ms. Odenhahl during the interview, my only regret is not having a sexy name, such as The Forecloser or Lord of the Liens.  Too late now.

More Indiana Commercial Foreclosure Law in a day or two....


Creditor’s Lack Of Recourse Against Corporation Not A Proper Basis For Piercing The Corporate Veil

In County Contractors v. Songer, 4 N.E.3d 677 (Ind. Ct. App. 2014), a mechanic’s lien and breach of contract case, the plaintiff filed claims against the shareholders of an excavation contractor, a corporation, which was defunct.  Plaintiff sought to collect money owed by the corporation from its individual owners.  The trial court concluded that the shareholders were personally liable, and the shareholders appealed, resulting in the Country Contractors opinion that discusses the issue of piercing the corporate veil. 

Fundamental principle.  As the lawyer for the plaintiff creditor, you know you’re cooked when the Court of Appeals starts its opinion by citing to “fundamental principles” of American and Indiana corporate law.  The Court in Country Contractors stated “that corporate shareholders sustain liability for corporate acts only to the extent of their investment and are not held personally liable for acts attributable to the corporation.”  From the top, the Court pointed out that the burden on parties seeking to pierce the corporate veil is “severe.”  

Undercapitalization.  Indiana law is well settled on what courts must examine in deciding whether to pierce the corporate veil, and my post of 3/29/13 goes over those rules, including the Aronson factors.  One of the eight Aronson factors is undercapitalization.  “Capitalization is inadequate when it is very small in relation to the nature of the corporation’s business and risks attendant to such businesses.”  Importantly, the adequacy of capital generally is measured “as of the time of the corporation’s formation.”  A corporation that was adequately capitalized at the outset “but subsequently suffers financial reverses is not undercapitalized.”  In Country Contractors, the corporation originally was formed in 1983 and earned a profit for many years.  By the end of 2007, however, the corporation started operating at a loss.  The Court held:  “[plaintiff] failed to establish that [the corporation’s] dwindling capital was due to anything other than a general downturn in the economy and a specific downturn in the construction industry.”

Corporate formalities.  The second Aronson factor at issue was the alleged failure to observe corporate formalities.  Generally, “a corporation should be operated as a distinct and separate business and financial unit, with its own books, records, and bank accounts.”  The main argument against the shareholders in Country Contractors was that the corporation conducted all of its business from one bank account.  The Court found that it is not uncommon for small corporations to operate from one bank account.  Additionally, the record was devoid of any facts suggesting that the shareholders had comingled personal and corporate funds or used the bank account for personal purposes.  The Court ultimately held that the plaintiff “failed to establish a causal link between the corporation’s recordkeeping and any injustice resulting from it.” 

Causal connection.  The Court’s opinion highlighted the need for a “causal connection” between an Aronson factor and the fraud against the plaintiff before the veil can be pierced.  I discussed this principle in detail in my 3/20/13 post.  The general rule is that “the fraud or injustice alleged by a party seeking to pierce the corporate veil must be caused by, or result from, misuse of the corporate form.”  In Country Contractors, the Court concluded that there was no causal link between either the alleged undercapitalization or the abuse of corporate formalities, and any injustice resulting from them.  This doomed the plaintiff’s case.

Out of luck.  The trial court had ruled in the shareholders’ favor, in part, because the corporation had filed bankruptcy and the plaintiff had “no other recourse” except as against the shareholders.  Immaterial, said the Court of Appeals:  “lack of other recourse simply is not a proper basis for piercing the corporate veil.”  If it were, any entity contracting with a company that ends up in bankruptcy could pursue its owners individually.  This would be contrary to the fundamental principles of corporate law.  However frustrating, this is simply the risk you run in doing business with a corporation, as opposed to individuals, when the corporate owners do not personally guarantee the outcome. 


Sheriff’s Sale Credit Bid: Ensure Post-Judgment Damages Are Readily Ascertainable And Undisputed

If, as a lender, you tender a full credit bid at your sheriff’s sale, make sure you don’t unwittingly overbid.  If you do, you later could be forced to pay cash to cover the difference.  This is what happened in Stoffel v. JPMorgan Chase, 2014 Ind. App. LEXIS 34 (Ind. Ct. App. 2014)

Setting.  Stoffel arose out of a post-sale motion by a borrower/mortgagor to compel the plaintiff lender/mortgagee to pay an alleged surplus.  In Indiana, the sheriff must pay any surplus back to the mortgagor.  The borrower in Stoffel wanted to recover the alleged “difference between the face amount of the judgment and the amount bid at the sheriff’s sale,” even though the sheriff did not hold any excess sale proceeds. 

Foreclosure judgment.  The lender and the borrower in Stoffel entered into an agreed foreclosure judgment that awarded the amount of the debt, together with “any additional costs of collection, expense, and disbursements incurred from the date of the [lender’s pre-judgment affidavit of debt] to the date of the Sheriff’s Sale, including, but not limited to, Sheriff’s Sale costs, disbursements for real estate taxes, bankruptcy fees and costs, and disbursements for hazard insurance premiums.”  These additional items could not be specified until the sale. 

Credit bid.  The lender submitted a winning “credit bid” (a/k/a “judgment bid”) in the amount of $152,121.72.  The Court noted that a “credit bid” is made “by the judgment creditor in which no money is exchanged.”  The bid is not backed up by cash but rather the amount of the judgment.  The lender in Stoffel believed that the judgment amount was enough to cover its bid. 

Post-sale proceeding.  At a hearing on the borrower’s motion, the lender explained how its credit bid had been calculated.  The lender offered documents to verify certain post-judgment recoverable costs incurred by the lender.  The trial court denied the borrower’s motion, and the borrower appealed. 

Evidence.  The Court of Appeals pointed out what usually happens when amounts need to be added to a judgment after the fact: 

We acknowledge that judgment creditors routinely include post-judgment costs and expenses in their sheriff’s sale bids and demonstrate those calculations by affidavit.  In a typical case, the judgment creditor’s post-judgment costs and expenses are easily determined and the mortgage foreclosure proceeding ends with the issuance of a sheriff’s deed.  And where, as here, post-judgment costs and expenses are awarded in the foreclosure judgment, there is no question that the judgment creditor is entitled to recover those costs and expenses, which are usually readily ascertainable and undisputed

The problem in Stoffel was that the judgment included elements that were not really “readily ascertainable and undisputed.”  After delving into a technical discussion about the inadmissibility of the lender’s evidence, the Court concluded that much of the evidence was inadmissible.  For example, to prove certain facts, the lender simply tendered a letter instead of a sworn affidavit. 

Shortfall.  The lender paid the price, albeit a small price, for its technical error.  The Court studied the terms of the judgment and applied the limited amount of admissible evidence to those terms.  The Court calculated the amount of the judgment at the time of the sheriff’s sale and held that the lender overbid.  Ironically, in a case where the borrower owed the lender $152,121.72, the Court entered a post-sale judgment against the lender in the amount of $374.58. 

Takeaway.  Lenders and their counsel should articulate damages elements within the judgment with as much simplicity and clarity as possible.  Any contingent amounts should be written so the sheriff and the trial court can later plug and chug the numbers with ease - eliminating room for interpretation or proof hurdles.  For example, lenders must pay any delinquent real estate taxes before the sale.  Frequently, the amount of the tax liability is unknown at the time of the judgment and will not be paid until the day before the sale.  Judgments can (and should) grant an award for tax advancements, which will be readily ascertainable and undisputed.  On the other hand, the less ascertainable and more disputed the post-judgment damages items are, the more lenders set themselves up for scrutiny and proof problems later.