Paddock, LLC v. Bennett (In re Bennett), 17–6025

• Decision Date: 19 April 2018
• Docket Number: No. 17–6025,17–6025
• Citation: 584 B.R. 15
• Parties: IN RE: Benjamin and Teresia BENNETT, Debtors. The Paddock, LLC, Creditor–Appellant, v. Benjamin M. Bennett, Debtor–Appellee Teresia R. Bennett, Debtor–Appellee
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

584 B.R. 15

IN RE: Benjamin and Teresia BENNETT, Debtors.The Paddock, LLC, Creditor–Appellant,

v. Benjamin M. Bennett, Debtor–AppelleeTeresia R. Bennett, Debtor–Appellee

No. 17–6025

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: February 23, 2018

Filed: April 19, 2018

Siobhan Briley, Coralville, IA, for Appellant.

Rush Manatt Shortley, Cedar Rapids, IA, for Appellee.

Before SALADINO, Chief Judge, SHODEEN and SANBERG, Bankruptcy Judges.

SHODEEN, Bankruptcy Judge.

The Paddock, LLC appeals the bankruptcy court's¹ orders dated April 20, 2017, and September 5, 2017, confirming Benjamin and Teresia Bennett's chapter 13 plan. Because we agree with the bankruptcy court that the Bennetts can modify The Paddock, LLC's secured claim, we affirm.

BACKGROUND

The Paddock is in the business of installing, renting and selling manufactured homes in a planned neighborhood that it owns. In 2003 the Bennetts rented a home previously installed by The Paddock at 222 Hackeny Court in Iowa City, Iowa. A few years later The Paddock financed the Bennetts' purchase of that home through an installment sale contract. At the same time the parties entered into a Ground Lease for the lot underneath the home. The combination of these two contracts require the Bennetts to make monthly payments to The Paddock for the purchase of the home as well as for a maintenance fee. Personal property taxes are paid by the Bennetts to the County Treasurer. The Paddock pays real estate taxes on the land where the home sits.

In 2016 the Bennetts filed a Chapter 13 bankruptcy petition. Their proposed plan treated The Paddock's claim as partially secured and partially unsecured as provided for under 11 U.S.C. § 1322(b)(2). This code section states in relevant part: "[T]he plan may [m]odify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims." (emphasis added). The Paddock objected to this treatment arguing that it holds a security interest in real property that is the debtor's principal residence and is, therefore, protected from bifurcation of its claim under section 1322(b)(2). After conducting an evidentiary hearing, the bankruptcy court concluded that the Bennetts' home was not real property under Iowa law, overruled The Paddock's objection and confirmed the Bennetts' chapter 13 plan. This appeal followed. The Paddock presents two primary arguments. First, that the bankruptcy court committed error because the record as a whole demonstrates its intent to make the Bennetts' home a fixture. Second, that the bankruptcy court incorrectly applied the law.

STANDARD OF REVIEW

This appeal involves a mixed question of law (the bankruptcy court's application of Iowa law regarding fixtures) and fact (the bankruptcy court's fact findings regarding the property and the intent of the parties). As the United States Supreme Court recently observed, "Mixed questions are not all alike." U.S. Bank Nat. Ass'n v. Vill. at Lakeridge, LLC , ––– U.S. ––––, 138 S.Ct. 960, 200 L.Ed.2d 218, 222 (2018). But, as applicable here, certain "mixed questions immerse courts in case-specific factual issues—compelling them to marshal and weigh evidence, make credibility judgments, and otherwise address what we have ... called ‘multifarious, fleeting, special, narrow facts that utterly resist generalization.’ " Id. at 967, 200 L.Ed.2d at 227 (quoting Pierce v. Underwood, 487 U.S. 552, 561–562, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988) ). In such a situation, "appellate courts should usually review a decision with deference." Id. (citing Anderson v. Bessemer City, 470 U.S. 564, 574–576, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ). Accordingly, we review the bankruptcy court's determination that the manufactured home at issue is not a fixture under Iowa law with deference; that is, for clear error. Its conclusions of law are reviewed de novo . Green Tree Servicing, LLC v. Coleman (In re Coleman), 392 B.R. 767, 768 (8th Cir. BAP 2008).

DISCUSSION

In order for the anti-modification provision of 1322(b)(2) to apply, The Paddock's claim "must both be secured only by an interest ‘in real property’ and further, that the real property must be the ‘debtor's principal residence’ " In re Coleman, 392 B.R. at 770. The Paddock bears the burden of proof on these issues. In re Snowden, 546 B.R. 39, 44 (Bankr. E.D. Ky. 2016) ; In re Hutsler , No. 16-60275, 2016 WL 7984348, at *1, 2016 Bankr. LEXIS 4361, at *10 (Bankr. W.D. Mo. Dec. 19, 2016) ; In re Petrella , 230 B.R. 829, 832 (Bankr. N.D. Ohio 1999). Here, there is no dispute that the manufactured home is the principal residence of the debtors. The only dispute is whether that manufactured home is real property or personal property. That is an issue to be determined under the laws of the state of Iowa, which is where the home is located. In re Coleman, 392 B.R. at 772.

Iowa common law recognizes that personal property may become a fixture and be considered real property. See Cornell Coll. v. Crain , 211 Iowa 1343, 1345, 235 N.W. 731 (1931). Determining whether an item has become a fixture is not a simple process.

Fixtures are a species of property which are the dividing line between real and personal property, and to decide which side of the line certain property belongs is often a vexatious question. When we compare a thing at the extremity of one class with a thing at the extremity of another the difference is obvious, but when we approach the point of division difficulty arises in discovering where the distinction should be drawn.

Ottumwa Woolen–Mill Co. v. Hawley, 44 Iowa 57, 60 (1876). Three factors are applied to evaluate whether a property is a fixture: "(1) it is actually annexed to the realty or to something appurtenant thereto; (2) it is put to the same use as the realty with which it is connected; and (3) the party making the annexation intends to make a permanent accession to the freehold." Ford v. Venard , 340 N.W.2d 270, 271 (Iowa 1983) (citing Cornell Coll. , 211 Iowa at 1345, 235 N.W. 731 ). The third factor—the intention of the party making the annexation—is most important to whether an improvement is a fixture. Cornell Coll. , 211 Iowa at 1345, 235 N.W. 731.

At the hearing conducted by the bankruptcy court an employee of The Paddock's management company testified that any home installed in the community is placed on a full concrete foundation.² As part of this process she further explained that the wheels and axles are removed but the underlying structure used to attach these transportation items likely remained in place because there is no reason to remove it. Based upon the timing of her employment this witness was not present at the time the Bennetts' home was installed and she did not inspected the foundation under their home. The Bennetts contend that their home is not installed on a permanent foundation. Mr. Bennett testified that there is no cement foundation behind the plastic skirting that surrounds the home. There is a crawl space underneath the home along with piers and blocks that require maintenance to address the sinking and shifting of the home in order to keep it level.

Under Iowa law

[e]mphasis has also been given to the manner in which the structure is attached to the soil, if at all. We said in O'Bryon v. Weatherly and other cases cited supra that the method of attachment is of little controlling importance, although, by force of gravity alone, if the structure is intended to be and is properly a part of the realty, it becomes such. Therefore a physical attachment of the structure to the soil or to an appurtenance thereto is not essential to make the structure a part of the realty. The method of attachment may, however, and, under some circumstances does, quite conclusively establish the intention.

Cornell Coll. , 211 Iowa at 1345, 235 N.W. 731. The bankruptcy court identified specific facts that have been evaluated by Iowa courts to determine whether a structure is a fixture. Due to Mr. Bennett's personal knowledge of the home, and the manner in which it was installed, the bankruptcy court specifically found his testimony to be more credible than the testimony of The Paddock's representative. We see no reason to disturb that finding. Wright v. St. Vincent Health Sys., 730 F.3d 732, 739 (8th Cir. 2013) (such a finding is given deference and not easily challenged on appeal).

In further proof of its intent The Paddock points to language contained in the documents executed by the parties, specifically Section III of the Lease which states: "[t]he Land Owner and Resident agree that the Home shall be installed as a permanent improvement and fixture." The Bennetts argue that the documents are not dispositive of The Paddock's intent for a variety of reasons. The bankruptcy court agreed and enumerated a number of facts that support its conclusion that the parties did not intend to make the home a permanent accession to the real estate.

The installment sales contract provides that upon full payment of the purchase price a bill of sale (which is how...