In re Belmont Industries
| Decision Date | 11 December 1979 |
| Docket Number | Bankruptcy No. BK-1-79-1154 to BK-1-79-1156. |
| Citation | 1 BR 608 |
| Parties | In re BELMONT INDUSTRIES, a partnership, Eldie NMN Ferrell, Treva McCluskey Ferrell, Bankrupts. C. Kenneth STILL, Trustee, Plaintiff, v. CITY BANK & TRUST COMPANY, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Kyle R. Weems, Weill, Ellis, Weems & Copeland, Chattanooga, Tenn., for plaintiff.
Harold N. Roney, Camp & Roney, McMinnville, Tenn., for defendant.
The plaintiff in this proceeding is the trustee in bankruptcy in the cases of Eldie Ferrell, Treva Ferrell, and their partnership, Belmont Industries. The defendant, City Bank and Trust Company of McMinnville, Tennessee, is a creditor of the bankrupts.
In Eldie Ferrell's and Treva Ferrell's bankruptcies, the defendant filed a secured claim (No. 6 in each case) for $25,746.49 and interest. The trustee began this proceeding by filing a complaint objecting to the claim and asking that it be held unsecured. The trial was held on September 24, 1979.
The complaint alleged that the defendant failed to perfect its security interest because it filed its financing statement in the county when it should have filed it with the Secretary of State. The place of filing depends on whether or not the items of collateral in the security agreement and financing statement were "fixtures" for the purposes of Article 9 of the Uniform Commercial Code as enacted in Tennessee. Filing in the county (local filing) will perfect a security interest in fixtures. Tenn.Code Ann. §§ 47-9-302, 9-401(1) (Repl.Vol.1979).
The parties do not dispute that the office equipment — desks, chairs, typewriters, etc. — was not fixtures. As to it the defendant's security interest is not perfected.
Though there are other questions about the adequacy of the defendant's security agreement and financing statement, much of this controversy can be disposed of by determining which of the other items of collateral were fixtures. With regard to that question the court finds the following facts.
The bankrupts were partners in a laundry and dry cleaning business in McMinnville, Tennessee. The items in which the defendant asserts a security interest were generally the equipment of that business. The list relied on by the defendant as a list of collateral breaks it down into three categories — office equipment, dry cleaning equipment, and laundry equipment. The only witness who testified about the equipment was H.L. Malloy who sold it to the bankrupts. Mr. Malloy was in the laundry and dry cleaning business for 50 years and operated at the Belmont Industries location from 1941 until he sold the business.
He testified that all of the dry cleaning equipment could be taken out without damage to the building. It would have to be disconnected from air or steam pipes and from electric outlets. One machine would have to be disassembled but it would not damage the building to remove the disassembled machine. Mr. Malloy's testimony about the laundry equipment was much the same. The machines would have to be disconnected from air, steam, and electrical outlets but could be removed without damage to the building, with one exception. Mr. Malloy testified that the boiler could be removed only by removing the doors and part of one end of the building; the building was built around the boiler. Finally, Mr. Malloy testified that the building could be used for other purposes if the laundry and dry cleaning equipment were removed.
Whether the items in question were fixtures is to be determined by Tennessee law other than the Uniform Commercial Code. Tenn.Code Ann. § 47-9-313(1). The definition of fixture is significant in this case only as the determinant of whether the defendant filed its financing statement in the correct place under § 47-9-401(1) of the Tennessee Code. Neither the plaintiff's nor the defendant's interest in the goods derives from an interest in the real estate to which they are attached. The defendant asserts a security interest, and the plaintiff asserts a claim to the goods as a judgment lien creditor of the bankrupt under § 70c of the Bankruptcy Act. (11 U.S.C. § 110).
A comment on the law of fixtures in Tennessee appears at 42 Tenn.L.Rev. 354 (1975). The cases with which it is concerned generally involve one party whose claim depends on an interest in the real estate. Nevertheless, with some qualifications the cases reflect a consideration of interests relevant to cases like this.
The comment divides the cases into two groups, the second of which is more relevant to this case. It collects cases where the goods in question were conditionally owned, i.e., subject to a security interest. 42 Tenn.L.Rev. 354 at 355. Of particular interest are those cases where the conflict was between a real estate and a chattel mortgagee:
Although the UCC does not expressly so provide, authorities agree that the body of state law to be applied in determining whether an annexed article is a fixture, and thus whether section 9-313 is applicable, is that dealing with the rights of realty and chattel mortgagees in an annexed article.
Comment, 42 Tenn.L.Rev. 354, 374-375 (1975).
As to what the Tennessee decisions reveal the comment goes on to say:
A close, and hopefully fair, reading of the cases, however, suggest the following criteria for determining whether an article subject to an article 9 security interest will be denominated a fixture for purposes of applying section 9-313: (1) annexation to the realty, (2) intention that the article be permanently attached to the freehold, and (3) removal without substantial injury to the freehold.
Annexation
Annexation is material in the first instance because an article cannot be a fixture at all if it is not annexed to realty. Whether something is annexed depends on the degree of attachment.
The degree to which the article must be fastened to the property depends on its size, weight, shape, and function. A heavy safe may meet the annexation test due to the fact of gravity alone. Equipment specially made for a particular building usually requires only a slight degree of attachment to be considered annexed. Generally, however, annexation requires attachment to the real property by bolts, nails, cement or the like.
42 Tenn.L.Rev. 354, 359 (1975).
Usually the attachment is such that the items in question may or may not be fixtures, and the degree of attachment is only one factor to be considered. Compare Lenoir Land Co. v. Haynes Heating Co., 166 Tenn. 494, 63 S.W.2d 659 (1933) and Knoxville Gas Co. v. W.I. Kirby & Sons, 161 Tenn. 490, 32 S.W.2d 1054 (1930). Thus the annexation test is usually a threshold test. The court need only find that the items do not fall in the category of those clearly not fixtures. In this case the threshold has been crossed. The laundry and dry cleaning equipment was attached to steam and air pipes and to electrical outlets. It cannot be moved without some effort in disconnecting it. It cannot be said to be clearly not fixtures. In that sense the machines were annexed to the realty.
Intention
Intention is a misleading term in defining the test used by the courts.
In reality, the courts have viewed the annexation from the perspective of an innocent realty mortgagee. If that party could have relied on the article being included in his mortgage on the real estate, the requisite intention will be found. The criterion of intent thus involves an objective determination of a realty mortgagee\'s expectation that an article was intended to be a permanent annexation to the realty.
42 Tenn.L.Rev. 354, 377 (1975).
The court in In re Kann, 6 U.C.C.Rep. Serv. 622, at 630 (Bankr.Dec., E.D.Pa.1969) described intention as follows:
In speaking of intention . . . we are not concerned with a state of mind, nor with an expressed intention, but with apparent intention inferred from all the facts and circumstances surrounding the installation of the tangible property upon the realty. This consideration includes the relationship of the parties, the nature of the article and the mode of its attachment or annexation.
In this case the machines, except the boiler, were not affixed to the building in any substantial way. They could be disconnected from the air and steam pipes and electrical outlets without damage to the machines or the plumbing. Disconnecting and moving the machines would not cause any significant damage to the building.
The building itself is useable for purposes other than as a laundry and dry cleaning business. It has been so used for many years and has the necessary plumbing but is nevertheless not so peculiarly adapted that it cannot be used for other purposes.
Between the bankrupts and the owner of the realty there could be no dispute as to rights in the machinery. The bankrupts bought the machines from the owner of the realty and leased the building from him. He certainly could not claim the machines as part of the realty. See Hart v. Appalachian Washed Coal Co., 139 Tenn. 204, 201 S.W. 515 (1917).
Any mortgagee of the realty who made slight inquiry should have learned of the relationship of the bankrupts and the owner of the realty as to the machines. The defendant in this case knew or had reason to know that the bankrupts bought the machines from the owner of the realty and rented the business premises.
This case is similar to In re Regency Furniture, Inc., 7 U.C.C.Rep.Serv. 1384 at 1386 (Bankr.Dec., E.D.Tenn.1970), where the machinery was described as follows:
These goods are machines weighing from 50 pounds to 6,000 pounds each and used in the manufacture of bedroom furniture. Most are connected to electrical outlets and, in addition, some are connected to a dust collection system. The machines include air compressors, sanders, presses, printing machines, saws, routers, drill presses, grinders, shapers, sprayers, motors, clamping machines, and glue spreading...
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