In re Hill

• Decision Date: 25 February 1988
• Docket Number: Bankruptcy No. 1-86-02737,Adv. No. 1-87-0238.
• Citation: 83 BR 522
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee
• Parties: In re Hugh Gerald HILL & Era Gwendolyn Hill, Debtors. Hugh Gerald HILL & Era Gwendolyn Hill, Plaintiffs, v. William F. EARTHMAN, Richard D. Taylor, & First National Bank of McMinnville, Tennessee, Defendants.

83 B.R. 522 (1988)

In re Hugh Gerald HILL & Era Gwendolyn Hill, Debtors.

Hugh Gerald HILL & Era Gwendolyn Hill, Plaintiffs, v. William F. EARTHMAN, Richard D. Taylor, & First National Bank of McMinnville, Tennessee, Defendants.

Bankruptcy No. 1-86-02737, Adv. No. 1-87-0238.

United States Bankruptcy Court, E.D. Tennessee.

February 25, 1988.

Robert S. Peters of Swafford, Peters & O'Neal, Winchester, Tenn., for debtors.

Maclin P. Davis, Jr. and H. Buckley Cole of Waller, Lansden, Dortch & Davis, Nashville, Tenn., and Alf Adams, Jr., of Adams, Taylor, Philbin, Pigue & Marchetti, Nashville, Tenn., for defendants, William F. Earthman and Richard D. Taylor.

Scott N. Brown, Jr., of Brown, Dobson, Burnette and Kesler, Chattanooga, Tenn., for defendant, First Nat. Bank of McMinnville.

RALPH H. KELLEY, Chief Judge.

The court lifted the automatic stay in the plaintiffs' (the Hills') bankruptcy case so that First National Bank of McMinnville could foreclose a mortgage on the Hills' land. The bank transferred the mortgage to the defendant, Earthman, who began foreclosure.

Earthman and the Hills disagreed over who was entitled to nursery plants the Hills were raising on the land. The Hills threatened to remove the plants or actually began removing them against Earthman's wishes.

Earthman sued the Hills in state court to enjoin them from removing the plants and to have a receiver appointed. The Hills responded by bringing this suit.

The Hills contend that they can use the avoiding powers under Bankruptcy Code § 544, in conjunction with Article 9 of the Uniform Commercial Code, to avoid Earthman's claim to the plants.

Earthman argues that his mortgage applies to the plants and has priority over the Hills' avoiding powers because Tennessee real property law, not Article 9 of the UCC, controls.

In addition to the above facts, the court finds the facts as follows.

The Hills executed the mortgage to the bank in 1982, after Article 9 of the UCC had become effective in Tennessee. The mortgage was duly recorded in 1982 long before the Hills' bankruptcy in 1986. The mortgage does not describe the collateral as crops, rents and profits of the land, or products of the land. The bank did not file a UCC financing statement to cover nursery plants or crops on the land or farm products.

When the Hills filed their bankruptcy petition, they acquired the rights under Bankruptcy Code § 544(a) of a third party with a judgment or execution lien on all their property. At the same time, Bankruptcy Code § 362 automatically stayed the bank from foreclosing on the mortgage. 11 U.S.C. § 362(a).

This dispute arose, as explained earlier, after the court lifted the automatic stay so that the bank could foreclose. Earthman has foreclosed subject to the court's decision in this proceeding.

DISCUSSION

The issues in this case revolve around differences between the real property law and Article 9 of the Uniform Commercial Code. Under Tennessee real property law, Earthman's mortgage can apply to the plants even though it does not mention plants or crops or rents and profits of the land or anything else that might be interpreted to include the plants as collateral for the debt secured by the land.

Earthman contends that real property law not only makes his mortgage apply to the plants but also determines the priority of the lien against the Hills' avoiding powers under Bankruptcy Code § 544(a). Of course, Earthman assumes that under the real property law his mortgage will have priority.

Under Article 9 of the UCC, Earthman is faced with two attacks on the mortgage.

The Hills could first argue that Earthman's mortgage does not apply to the plants at all. Article 9 requires a security agreement to describe the collateral in order to create a security interest. Since Earthman's mortgage does not describe the collateral to include the plants, it does not create an Article 9 security interest. Article 9 appears to have abolished the rule that a mortgage on land automatically applies to crops because of their attachment to the land. If this is true, then Earthman's mortgage gives him no claim to the plants at all.

The Hills have concentrated on the second attack under the UCC. Assuming the real property law still makes the mortgage apply to the plants, the real property law does not determine its priority against the Hills' rights as a judgment lien creditor; Article 9 of the UCC determines priority. Furthermore, the Hills' rights have priority because the mortgage was not perfected as to the plants by filing a UCC financing statement before the Hills' bankruptcy.

Under this argument, a mortgage on land can create two liens on crops. It can create an Article 9 security interest if it describes the collateral to include crops. The same mortgage can also be a lien on crops under the real property law.

The priority of the Article 9 security interest against other claims to the crops, separately from the land, will be determined by the rules of Article 9. The Hills and Earthman disagree as to what law should determine the priority of the real property lien on crops against a security interest or a judgment or execution lien on the crops. Earthman argues that real property law controls. The Hills argue that Article 9 should control. The Hills assume that they can avoid Earthman's real property lien on the plants if Article 9 controls.

These major arguments are dealt with last, in part 4 of this discussion. The court must deal with three subsidiary questions before reaching the major issues.

(1) Are nursery plants a crop under the real property law and Article 9 of the UCC?

(2) If Article 9 controls priority, can the Hills avoid Earthman\'s mortgage as a lien on the plants?

(3) If the real property law controls priority, can the Hills avoid Earthman\'s mortgage on the plants?

(4) Does Article 9 or the real property law control?

The court will now consider the first question.

(1)

Are nursery plants a crop under Article 9 of the UCC and under Tennessee real property law?

The movability of nursery plants causes a problem with treating them as a crop under either Article 9 or the real property law. More common crops such as cotton, soybeans, and grain are not movable while they are still growing. Their attachment to the land is necessary to their survival and their value. On the other hand, a nursery operator may raise a perennial tree or shrub to sell at one year old, two years old, three years old, or older. When the plant reaches the earliest age at which it is both safely movable and readily marketable, it is movable and should be treated as mature, despite the nursery operator's intent not to sell it until it is older.

This problem apparently led Bankruptcy Judge Hippe to hold that nursery plants are a crop under Article 9 only until they reach maturity. At maturity they change their Article 9 category to inventory, which means property held for sale. In re Frazier, 16 B.R. 674 (Bankr.M.D.Tenn. 1981); Tenn.Code Ann. §§ 47-9-105(1)(h) & 47-9-109(3) & (4). Since the Hills have chosen not to pursue the issue when it could have been to their advantage, the court concludes that the plants are a crop under Article 9.

Movability is less of a problem under the real property law. Some courts have held that mature crops are not subject to a mortgage because they can be readily moved by harvesting and should be treated as purely personal property. The Tennessee Supreme Court rejected this argument. It held that mature but unharvested crops are subject to a mortgage on the land. Langford v. Hudson, 146 Tenn. 309, 241 S.W. 393 (1921).

The Tennessee Court of Appeals held that nursery plants are a crop despite their differences from more common seasonal crops. The question was whether nursery plants should be treated as a crop for the purpose of determining the amount of damages the county owed a farmer for land it took to widen a road. Shelby County v. Adams, 15 Tenn.App. 66 (1932). The court of appeals held the plants were a crop even though the nursery operator was able to move them to other land.

The court concludes that the plants are a crop under Tennessee real property law. The court will next consider the second question.

(2)

If Article 9 controls priority, can the Hills avoid Earthman's mortgage as a lien on the plants?

When the Hills filed their chapter 12 bankruptcy case, they became debtors-in-possession and acquired the avoiding powers usually given to a bankruptcy trustee. 11 U.S.C. §§ 1203, 1106, & 704.

The Hills rely on Bankruptcy Code § 544(a). 11 U.S.C. § 544(a). Section 544(a) does not describe any particular kind of pre-bankruptcy transfer that can be avoided. It merely bestows on the Hills certain rights under Tennessee law. Tennessee law determines whether those rights will allow the Hills to avoid any pre-bankruptcy transfers of their property.

Section 544(a) gives the Hills the rights of a person who, at the time of the Hills' bankruptcy and without notice of the mortgage, became a creditor of the Hills and obtained a judgment or execution lien on all the Hills' real and personal property which could be subject to such a lien. Section 9-301 of the UCC provides that a later judgment lien creditor without actual notice of an earlier security interest has priority over the security interest if it is unperfected. Tenn.Code Ann. § 47-9-301(1)(b). Thus, the Hills generally can avoid a security interest in their property that was not perfected before their bankruptcy.

If Earthman's mortgage is treated as a security interest, the first question is whether it was perfected at the time of the Hills' bankruptcy.

Perfection of a security interest in a crop requires the filing of a UCC financing statement. Tenn.Code Ann. §§ 47-9-302 & 47-9-401. Neither the bank nor Earthman filed a financing statement as to the plants.

The recording of the mortgage cannot be treated as the filing of a financing statement. A financing statement as...