Monday, January 2, 2012

FYI: 6th Cir BAP Rules Against Mortgagee in Debtor's Challenge to Lien Involving Manufactured Home

The Bankruptcy Appellate Panel of the U.S. Court of Appeals for the Sixth Circuit recently held that: (1) a chapter 13 debtor had standing to pursue an avoidance action against the holder of a mortgage on land that included a manufactured home; and (2) the mortgage could be avoided, as the steps necessary to either perfect the lien on the home or convert the home from personal to real property had not been taken.
A copy of the opinion can be found at:
Debtor purchased a tract of land using the proceeds of a loan he obtained from a mortgage lender.  The loan was secured by a lien that had been timely and properly recorded.  The lien encumbered the real property and all improvements and fixtures on the land.  Located on the land was a manufactured home.  A letter in the lender's file indicated that prior to the Debtor's purchase of the property, a mobile home had been gutted and then rebuilt as the current manufactured home.  Debtor did not acquire separate title to the manufactured home.  The promissory note and mortgage were eventually assigned to an asset securitization trust (the "Bank"). 
Debtor subsequently filed for Chapter 13 bankruptcy protection.  The bankruptcy court granted Debtor's motion for derivative standing to file an adversary proceeding against the Bank to avoid the Bank's lien on the home. 
In his adversary action against the Bank, Debtor claimed in part that the Bank's interest in the manufactured home was avoidable because the Bank had failed to perfect its lien on the manufactured home pursuant to Kentucky law.  The Bank asserted various arguments, including that Debtor lacked standing, lacked title to the home, and the home was not part of the bankruptcy estate.  The bankruptcy court rejected the Bank's arguments and ultimately granted summary judgment in favor of the Debtor.  The Bank appealed, and the Sixth Circuit Bankruptcy Appellate Panel (the "Panel") affirmed.
The Panel first examined whether the Debtor had standing to bring the lien avoidance action.  Relying on its decision in Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399 (B.A.P. 6th Cir. 2010), the Panel concluded that the Debtor had derivative standing under the Bankruptcy Code to exercise a trustee's power to avoid a lien on a manufactured home.  The Panel noted Dickson's recognition that "the realities of chapter 13 bankruptcies 'make it imperative for a debtor to be able to pursue avoidance claims if the chapter 13 trustee refuses to do so'" for reasons that may include a trustee's lack of resources, the requirements associated with a chapter 13 plan, and the risk that a debtor may be perceived as acting in bad faith if his plan does not seek avoidance of an avoidable lien.   Id. at 405. 
As part of its analysis as to whether the lien on the manufactured home had been perfected, the Panel first considered and rejected the Bank's argument that the home did not constitute an asset of the bankruptcy estate.  Concluding that the Debtor had, "at a minimum, an equitable interest" in the home, the Panel ruled that the manufactured home was part of the estate.  See 11 U.S.C. § 541(a)(1)(defining property of the estate as "all legal and equitable interests of the debtor in property as of the commencement" of bankruptcy proceedings). 
The Panel then examined the Bank's argument that the manufactured home was subject to the Bank's lien as an improvement to real property.  Noting that property interests are created by state law unless federal law has an overriding interest, the Panel observed that in Kentucky, manufactured homes are considered personal property for which a certificate of title is required and that, in order to be perfected,  the lien must be noted on the certificate of title.  See Ky. Rev. Stat. Ann. §§186A.070(1),  §186A.190(2). 
The Panel also observed, however, that if an affidavit of conversion to real property is filed and the certificate of title surrendered, "a manufactured home can be converted from personal property to an improvement to real property . . . thereby allowing perfection through first recording without notice."   Again citing Dickson, the Panel further noted that a creditor may obtain a perfected lien on a manufactured home through a state court order converting the home to an improvement to real property.  The Panel pointed out that in this case the steps necessary for such conversion had not been taken.   See Ky. Rev. Stat. §§186A.297, 382.110.  Thus, the manufactured home remained personal property, and the only way of perfecting a lien on the home was to place a notation on the certificate of title, which was not done.
The Panel also rejected the Bank's argument that the manufactured home was a "fixture" and as such was specifically covered by the language of the mortgage loan.  In ruling that the home did not become a fixture on the land subject to the mortgage, the Panel distinguished this case, involving perfection of a security interest in a manufactured home as against other creditors, from the court opinion relied on by the Bank relating to conveyance of an affixed manufactured home without a title in a divorce proceeding
The Panel observed that even if the mortgage had given the Bank a lien on the manufactured home, the Bank failed to perfect that lien by noting its lien on the certificate of title.  See Whisman v. Whisman, 2007-CA-002534-MR, 2009 WL 2971552 (Ky. Ct. App. Sept. 18, 2009)(in a court-ordered sale of real property pursuant to a divorce proceeding, an affixed manufactured home without a title may be conveyed by deed). 
Finally, the Panel refused to consider the Bank's argument that the priority scheme set forth in Article 9 of Kentucky's version of the Uniform Commercial Code provides that a mortgage is a means of perfecting a lien on a manufactured home that is a fixture.  Because the Bank raised this assertion for the first time on appeal, the Panel concluded that the Bank had waived the argument.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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