First Nat. Bank of Aberdeen v. Jacobs

• Decision Date: 29 December 1978
• Docket Number: No. 11952,11952
• Citation: 273 N.W.2d 743
• Parties: 26 UCC Rep.Serv. 191 FIRST NATIONAL BANK OF ABERDEEN, Miguel M. Serna and Anita R. Serna, Plaintiffs and Respondents, v. Robert B. JACOBS, Kathleen C. Jacobs, Brown County, a Public Corporation, Louis Ludwig, Larson Concrete Co., Hub City Livestock Sales, Inc., South Dakota Wheat Growers Association, Redfield Livestock Auction, Inc., and Triple U Enterprises, Inc., Defendants, and Leaseamerica Corporation, Defendant and Appellant.
• Court: South Dakota Supreme Court

Page 743

273 N.W.2d 743

26 UCC Rep.Serv. 191

FIRST NATIONAL BANK OF ABERDEEN, Miguel M. Serna and Anita

R. Serna, Plaintiffs and Respondents, v. Robert B. JACOBS, Kathleen C. Jacobs, Brown County, a Public

Corporation, Louis Ludwig, Larson Concrete Co., Hub City

Livestock Sales, Inc., South Dakota Wheat Growers

Association, Redfield Livestock Auction, Inc., and Triple U

Enterprises, Inc., Defendants,

and

Leaseamerica Corporation, Defendant and Appellant.

No. 11952.

Supreme Court of South Dakota.

Dec. 29, 1978.

Charles B. Kornmann of Richardson, Groseclose, Kornmann & Wyly, Aberdeen, for plaintiffs and respondents.

Terence A. O'Keefe of Siegel, Barnett, Schutz, O'Keefe & Jewett, Aberdeen, for defendant and appellant.

PORTER, Justice.

CASE SUMMARY

This case involves ownership of a hog finishing barn near Aberdeen, South Dakota. The only parties involved in the appeal are the First National Bank of Aberdeen (Bank) and Leaseamerica Corporation (Leaseamerica). The Bank originally brought suit to foreclose the interest of defendants Mr. and Mrs. Jacobs in a half-section of land that the Jacobs were purchasing on contract for deed. Leaseamerica had leased the hog finishing barn to the Jacobs, and now claims that the barn did not become a fixture, but remained the personal property of Leaseamerica. Leaseamerica wishes to remove the barn, or in the alternative collect its reasonable value from the Bank, which has foreclosed upon the land containing the barn. We hold that the upper, aluminum portion of the barn did not become a fixture, and that the Bank has no rights by subrogation to prior owners or lienholders that would defeat the rights of Leaseamerica. We also hold that the Bank may not have the building on the strength of its own mortgage, but that the Bank would be entitled to compensation for damage done to the land if Leaseamerica removes the building. We therefore reverse the judgment and remand the case to the trial court for determination of damages that might be caused to the realty by removal of the building, or for determination of the reasonable value of the building to be paid by the Bank to Leaseamerica, at the option of the Bank.

FACTS

On October 21, 1971, Miguel and Anita Serna purchased a half-section of land in Brown County from Joseph Iverson. Iverson took back a mortgage and reserved a life estate interest so that he could live on the property until his death. On this same date, Robert and Kathleen Jacobs entered into a contract for deed with the Sernas. The Jacobs thereafter operated a farm, including a cattle and hog operation, on the half-section.

From March 13, 1973, until about September, 1974, the Bank was Jacobs' principal creditor. It loaned Jacobs nearly $200,000.00 during this time. As of April 10, 1975, the debt had been reduced to $158,319.90 through sale of personal property previously owned by Jacobs. Since paying off all prior interests, the Bank has the right to dispose of the land as it sees fit. The value of the land does not, however, equal the total of Jacobs' debt.

A Bank comment of May 3, 1974, indicates that Jacobs was negotiating with both Leaseamerica and Lease Northwest for a hog facility of the type which he eventually leased from Leaseamerica. Lease Northwest wanted to retain a security interest in the land; Leaseamerica apparently made no such demand. The building in question was The building is bolted to the concrete and block foundation. There are holding pits under the slated floor for hog waste. There is wiring and plumbing in the building. A system for grinding and delivering of feed is also present. The trial court found that removing the building would damage the real estate.

installed by the end of April, 1974. A lease was entered into on May 25, 1974, by which Jacobs agreed to pay $1,920.00 per quarter in lease payments. The lease provided that the building was to remain personal property, and that it was to remain the property of Leaseamerica. Jacobs was given no option to purchase the building. He was required to pay all taxes on the building. The lease covered only the aluminum walls and doors. Jacobs separately installed and paid for the concrete and block foundation. Leaseamerica claims no interest in this foundation.

The Jacobs gave the Bank a mortgage on the premises on August 2, 1974, in return for a $75,000.00 loan. The Bank advanced an additional $13,900.00 on August 15, part of which was used, as shown by Bank records, to make a lease payment to Leaseamerica. The Bank concedes that it knew of the lease transaction, but did not inquire further, since it assumed that this was a lease-purchase agreement.

Leaseamerica filed a Uniform Commercial Code financing statement in the Brown County Register of Deeds office, but did not record anything in the chain of title to the land. Leaseamerica never paid taxes on the building, nor was it entered on the tax rolls as personal property. The leasing company also never bought insurance on the building, but the contract required Jacobs to buy insurance. The contract called for 18% Interest when lease payments were late.

In January, 1975, the Bank paid the Sernas and Joseph Iverson for their mortgage and contract for deed interests in the property. This was done to protect the Bank's security as a junior lienor. The Bank obtained a satisfaction of the Iverson mortgage, which has not been recorded, and a warranty deed from the Sernas. The name of the grantee has not been filled in on the deed, but the Bank, since January 2, 1975, has had the right to complete the deed by putting any name, including its own, in the blank.

The trial court ruled that Leaseamerica had no interest in the premises, that it could not remove the building, and that it was not entitled to any compensation for leaving the building on the premises.

ISSUES

The major issues presented by this appeal are:

Issue One: Is the building a fixture?

Issue Two: Is the Bank entitled to the building as the successor to the rights of the Sernas and Iverson?

DECISION

ISSUE ONE:

We conclude that the building is not a fixture.

The controlling criterion in determining whether an article becomes a "fixture," and thus a part of the realty, is the intention of the party placing the article on the land. Killian v. Hubbard, 69 S.D. 289, 9 N.W.2d 700 (1943); Metropolitan Life Ins. Co. v. Jensen, 69 S.D. 225, 9 N.W.2d 140 (1943). This intent is not the secret intent in the mind, but the intent that may be deduced from the relation of the parties and the circumstances of the particular case. The physical facts are to be considered, particularly whether the article placed on the land is designed to promote the use to which the realty has been put. Metropolitan Life Insurance Co. v. Jensen, supra. The parties may, however, agree that the article placed on the land is to remain a chattel or is to become a fixture. Home Owners' Loan Corporation v. Gotwals, 67 S.D. 579, 297 N.W. 36 (1941); Curran v. Curran, 67 S.D. 119, 289 N.W. 418 (1939); Myrick v. Bill, 3 Dak. 284, 17 N.W. 268 (1883).

Under these rules, the building remained personalty as between Jacobs and Leaseamerica. Their agreement, although a form contract, is explicit on this point. The record does indicate that the agreement was signed After the building was installed. As we held in Home Owners' Loan Corporation v. Gotwals, supra, however, even property that has been a fixture can become personal property by agreement.

We must also inquire whether the building became a fixture as between the Sernas and Iverson and Leaseamerica. The Bank claims any rights that the Sernas and Iverson had as their assignee or as a redeeming junior lienholder under SDCL 44-3-4 to 44-3-7. See SDCL Ch. 43-42; First National Bank, Bismarck v. O'Callaghan, 143 N.W.2d 104 (N.D.1966). This determination involves the question of Jacobs' intent as shown by the facts of the case. Metropolitan Life Insurance Company v. Jensen, supra. There were no agreements between the Sernas and Iverson and Leaseamerica. The building was securely attached to a concrete and block foundation, and was adapted to the purpose for which the land was used. Jacobs was a mortgagor and contract for deed vendee, which could arguably indicate that he intended to attach the building to the land. See Metropolitan Life Insurance Company v. Jensen, supra.

The lease contract, on the other hand, expressly declares the parties' intent that the building is to remain personal property. The Bank attacks this agreement as one-sided, and contends that it was probably not understandingly entered into. There is, however, no finding to this effect, and no evidence on the record to indicate that the agreement was not voluntarily and understandingly made. As Leaseamerica points out, Jacobs was in a difficult position financially in mid-1974. By entering into this lease, he was able to have a new hog finishing barn at once for an initial payment of about $2,000.00. He could, therefore, very well have intended to have the barn remain personal property, since having it remain so was beneficial to him. The lease confirms this intent, and is an express declaration that Jacobs wanted the building to remain personal property. The trial court's finding that Jacobs' intent is "unknown" therefore has no support in the evidence, and is clearly erroneous. SDCL 15-6-52(a).

The Bank argues that Leaseamerica should not be permitted to take advantage of its agreement as evidence of Jacobs' intent because the agreement was never recorded. The agreement is thus said to be evidence only of Jacobs' "secret" intent, Metropolitan Life Insurance Co. v. Jensen, supra, not of his intent as manifested by the facts. The Bank, however, Knew that the transaction was a lease. It failed to inquire further and "assumed" that it was a lease-purchase agreement. Leaseamerica concedes that it should have done more to...