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From Banking and Finance Law Daily, August 26, 2015

Creditors may perfect mobile home liens under Kansas common law

By Lisa M. Goolik, J.D.

The U.S. District Court for the District of Kansas has held that a bankruptcy trustee may exercise its powers under the Bankruptcy Code to avoid a credit union’s lien on a debtor’s mobile home if: (1) the credit union’s mortgage described the collateral as the real property together with the fixtures attached thereto; and (2) the mobile home became a fixture to the real property under the Kansas Manufactured Housing Act (KMHA) or Kansas common law. In arriving at its conclusion, the district court refuted a ruling by the Bankruptcy Appeals Panel for the Tenth Circuit that the KMHA provides the exclusive method by which mobile homes can become fixtures under Kansas law (Morris v. Ark Valley Credit Union, Aug. 25, 2015, Marten, J.).

Background. The debtor purchased a parcel of land onto which he moved a mobile home. The debtor and his wife lived in the home, and paid off the home’s purchase money loan in 2007.

In 2009, debtor borrowed $21,000 from Ark Valley Credit Union (AVCU) on a home equity line of credit, secured by a 15-year revolving credit mortgage granted on the realty. The mortgage did not note the presence of the mobile home on the property.

One year later, the debtor obtained a second line of credit from AVCU in the amount of $26,000 and executed another revolving credit mortgage against the property. The collateral description was identical to the 2009 mortgage and did not reference the mobile home on the property.

The debtor believed that the mortgage encompassed the mobile home. As a result, he never took steps under the KMHA to ensure that the mobile home became a fixture to the realty.

When the debtor filed for Chapter 7 bankruptcy protection, he claimed the property exempt as his homestead and did not schedule the mobile home separately as personal property. After AVCU asserted a lien on just the mobile home, the bankruptcy trustee sought to avoid the lien under his avoidance powers pursuant to 11 U.S.C. § 544(a).

However, the bankruptcy court ruled against the trustee, reasoning that the security interest was governed by the Kansas Uniform Commercial Code because the manufactured home is personal property, and under Section 9-108 of the UCC a consumer-transaction security agreement must describe the collateral by more than type alone. The bankruptcy court concluded that because the mortgage did not specifically reference the mobile home it was not sufficient to perfect the lien, and the trustee could not avoid the lien.

Application of Article 9. Under Section 9-108 of the Kansas UCC, a “fixture” is a type of consumer-good collateral and therefore must be described by more than type alone. The comments to the section provide that the section requires greater specificity of description “in order to prevent debtors from inadvertently encumbering certain property,” and the test for sufficiency of a description is whether the description does “the job assigned to it: make possible the identification of the collateral described.”

In the instant case, AVCU’s mortgage identified the real property by address and described the collateral as the real property, “with all the improvements now or hereafter erected on the property, and all easements, rights, appurtenances and fixtures, all of which shall be deemed to be and remain a part of the property covered by this Mortgage.”

The district court reasoned that the property description, the words “together with,” and the word “fixtures” should be read together. As a result, the mortgage described a specific parcel of land, providing a “descriptive component beyond [fixture] alone.” As a result, the description “does ‘the job assigned to it’ by making identification of the collateral possible: one need only be present at the parcel and observe fixtures and improvements thereon to identify the collateral,” wrote the court.

While the court concluded that the AVCU mortgage sufficiently described fixtures to the real property as collateral for the mortgage, “the remaining question is whether the subject mobile home is a fixture under Kansas law.”

Fixtures under Kansas law. The KMHA provides that a mobile home is considered a fixture to the realty where it is located if it is permanently affixed thereto and its certificate of title is eliminated pursuant to the law. While it was undisputed that the debtor never took any action to eliminate the mobile home’s certificate of title, the trustee argued that the home could also have become a fixture under Kansas common law.

The AVCU responded that the Bankruptcy Appeals Panel for the Tenth Circuit has held that the KMHA “elimination” provision is the exclusive means by which manufactured homes can become fixtures under Kansas law. However, the district court determined that the BAP’s ruling was not precedential, stating, “the court must undertake to interpret the ambiguous statute by first looking ‘to rulings of the highest state court, and if no such rulings exist, must endeavor to predict how the high court would rule.’”

After conducting its own review of the statute’s language, the district court concluded that the KMHA does not plainly read that a manufactured home can only become a fixture if the requirements under the KMHA are met. “The ordinary meaning of the statute does not exclude common law as a means of converting a manufactured home into a fixture; it merely provides a set of conditions under which one can guarantee that a mobile home will be treated as a fixture,” reasoned the court.

Accordingly, the court concluded that the AVCU mortgage may have created a security interest that attached to the manufactured home if the home had become a fixture to the realty under Kansas common law. As a result, the court remanded the case to the bankruptcy court for further proceedings.

The case is No. 15-1024-JTM.

Attorneys: J. Michael Morris, pro se. Eric D. Bruce (Bruce, Bruce & Lehman LLC) for Ark Valley Credit Union.

Companies: Ark Valley Credit Union

MainStory: TopStory KansasNews Mortgages SecuredTransactions

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