By Paul Hodnefield, Esq.

Perfecting a purchase-money security interest (“PMSI”) can be a challenge for the secured party when the collateral includes goods that are or are to become fixtures.  The PMSI perfection requirements are different for fixtures than for other types of goods.  As a result, the secured party’s ability to enforce a PMSI will sometimes turn on whether the court determines that particular goods are fixtures.  That was the situation competing creditors encountered in the recent case of In re: Marble Cliff Crossing Apartments, LLC, 2012 Bankr. LEXIS 5952 (Bankr. S.D. Ohio Dec. 28, 2012).

Marble Cliff Crossing Apartments, LLC (the “Debtor”) owned a large, upscale apartment complex.  The Debtor granted MTGLQ Investors, LP (“MTGLQ”) a security interest that covered all the collateral at issue in the case.  There was no dispute that MTGLQ had perfected its security interest.

Later, Bresco Solutions, LLC (“Bresco”) sold and installed security equipment in the apartment complex, including cameras and related hardware.  The last paragraph of the purchase agreement between the Debtor and Bresco granted Bresco a security interest in all of the cameras, computers, servers and monitors.  Bresco perfected its security interest by filing a financing statement with the Ohio Secretary of State.

The following year, Bresco sold and installed wireless internet access equipment at the apartment complex.  The equipment included a rack, controller, wireless access points and related wiring.  Bresco filed a second financing statement with the Ohio Secretary of State to cover the installed goods.  Bresco did not file a UCC financing statement in the county real estate records for either transaction.

After the Debtor filed for bankruptcy, MTGLQ brought an adversary action seeking to determine the validity and priority of Bresco’s security interests.  MTGLQ claimed that the security and internet hardware were fixtures.  A PMSI in fixtures can only be perfected by a fixture filing.  Bresco’s filings with the Secretary of State, therefore, were not sufficient to perfect a PMSI in fixtures.

The outcome of this issue would depend entirely on whether the security and internet equipment were fixtures.  If so, then Bresco was unperfected because it failed to make a fixture filing in the county real estate records.  However, if the installed goods were not fixtures, then Bresco’s PMSI was perfected by the financing statement it filed with the Secretary of State.

To determine whether the installed security and internet equipment were fixtures, the court applied a test that weighed three factors: (1) actual attachment of the goods to the real property; (2) appropriation of the goods to the use or purpose of the part of the real property with which it is connected; and (3) the intention of the parties that the goods become a permanent part of the real property.

First, the court observed that the goods in question were only slightly attached.  Some of the goods were freestanding.  Others could be detached simply by removing a few screws.  All of the goods could be removed with little or no harm to the real property.  Next, the court noted that the goods benefitted the business conducted on the property, but not the property itself.  The goods were not integral parts of the real estate.  Finally, the court determined that the parties did not intend for the goods to become fixtures.

In this case, all three parts of the test weighed against finding that the goods met the definition of “fixtures.”  The court, therefore, found that the goods were not fixtures under Ohio law and that no fixture filing was necessary for Bresco to perfect its PMSI.  Consequently, Bresco’s PMSI in the installed security and internet equipment took priority over MTGLQ’s prior perfected security interest.

The important thing to take away from this case is that there is no way to predict in advance whether a court will find that goods are fixtures.  A court will always make that determination based on the unique facts and circumstances of the particular case.  By the time a court becomes involved, it will already be too late for the secured party to further protect itself.  Therefore, if there is any question whether purchase-money collateral includes fixtures, the secured party should perfect a PMSI by filing in the appropriate state-level filing office and by making a fixture filing in the county records.

Paul Hodnefield is Associate General Counsel for Corporation Service Company (CSC) and a frequent speaker/writer on UCC search and filing issues. Please feel free to contact him with questions or comments at phodnefi@cscinfo.com, or 800-927-9801, ext. 62375.

UCC Expert Corner: Court Finds No Fixture Filing Required to Perfect PMSI in Security Equipment