In re Michael Szerwinski v. ( 2012 )

ELECTRONIC CITATION: 2012 FED App. 0002P (6th Cir.)File Name: 12b0002p.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: MICHAEL JOSEPH SZERWINSKI; )
DONNA MARIA SZERWINSKI, )
)
Debtors. )
______________________________________ )
)
JOSIAH L. MASON, CHAPTER 7 TRUSTEE, )
Appellant, ) No. 11-8050
)
v. )
)
MICHAEL JOSEPH SZERWINSKI; )
DONNA MARIA SZERWINSKI; PNC BANK )
f/k/a NATIONAL CITY BANK; )
MUSKINGUM WATERSHED )
CONSERVANCY DISTRICT, )
Appellees. )
______________________________________ )
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio.
Bankruptcy Case No. 09-64294.
Adv. Case No. 10-6009
Argued: February 7, 2012
Decided and Filed: March 15, 2012
Before: EMERSON, FULTON, and McIVOR, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: Josiah L. Mason, MASON, MASON & KEARNS, Ashland, Ohio, for Appellant.
Amelia A. Bower, PLUNKETT COONEY, Columbus, Ohio, for Appellee. ON BRIEF: Josiah
L. Mason, MASON, MASON & KEARNS, Ashland, Ohio, for Appellant. Amelia A. Bower,
PLUNKETT COONEY, Columbus, Ohio, for Appellee.
____________________
OPINION
____________________
MARCI B. McIVOR, Chief Bankruptcy Appellate Panel Judge. Josiah L. Mason, Chapter
7 Trustee (“Trustee”), appeals an order of the bankruptcy court dismissing the Trustee’s adversary
complaint against Michael Joseph Szerwinski and Donna Maria Szerwinski (the “Debtors”), PNC
Bank (f/k/a National City Bank) (“Bank”), and Muskingum Watershed Conservancy District
(“Conservancy District”). The bankruptcy court dismissed the Trustee’s complaint based on its
finding that the security interest held by the Bank in Debtors’ cottage and lease is valid. For the
reasons that follow, the Panel affirms the bankruptcy court’s order finding: (1) the Bank holds a
properly perfected security interest in the cottage and lease; and (2) dismissing the Trustee’s
complaint.
ISSUES ON APPEAL
The issues presented by this appeal are whether the bankruptcy court erred in dismissing
Trustee’s complaint on the grounds that: (1) that Debtors’ cottage is not chattel; (2) the Bank
properly perfected its security interest by the recording of a mortgage; and (3) Trustee cannot avoid
the Bank’s security interest.
JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
The United States District Court for the Northern District of Ohio has authorized appeals to the
Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C.
§§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to
28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits
and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United
States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). The bankruptcy court’s
order determining the validity of the Bank’s lien and dismissing the Trustee’s complaint is a final,
2
appealable order. Rabin v. Shanker (In re Shanker), 347 B.R. 115 (B.A.P. 6th Cir. 2006) (unpub.
table decision).
The bankruptcy court’s conclusions of law are reviewed de novo. Riverview Trenton R.R.
Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940 (6th Cir. 2007). “Under a de novo standard of
review, the reviewing court decides an issue independently of, and without deference to, the trial
court’s determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798,
800 (B.A.P. 6th Cir. 2007). The court’s findings of fact are reviewed under the clearly erroneous
standard. In re DSC, Ltd., 486 F.3d at 944. “A finding of fact is clearly erroneous ‘when although
there is evidence to support it, the reviewing court on the entire evidence is left with the definite and
firm conviction that a mistake has been committed.’” Id. (quoting Anderson v. City of Bessemer City,
470 U.S. 564, 573, 105 S. Ct. 1504 (1985)).
FACTS
On September 22, 2006, Debtors entered into a 30-year lease (“Lease”) with the Conservancy
District.1 The lease covered property located on Lot CM 234 at Charles Mill Reservoir, and with a
street address of 945 Trout Drive, Mansfield, Ohio 44903 (“cottage”). The Lease was recorded in
Richland County Recorder’s Office on October 3, 2006. It is undisputed that the Conservancy
District is the fee simple owner of the land.
The Lease contains four provisions that are relevant to the Panel’s decision. First, Section
5 of the Lease states that “the LESSEE must, within five (5) years from the date of this lease,
construct and maintain an approved residential dwelling on said premises.” (Adv. Docket # 48, Trial
Stipulations, Exh. A). When the Debtors entered into the Lease, a cottage had already been built on
said premises by previous lessee, K. J. and Ann Bargahiser (“Bargahisers”). The Bargahisers
subsequently sold the cottage to Jesse and Janet Hawks (“the Hawks”) through a bill of sale and
1
The Conservancy District is a political subdivision of the State of Ohio established under
Ohio Rev. Code Ann. § 6101 et seq.
3
assigned their leasehold interest. The Hawks subsequently assigned their leasehold interest to the
Debtors and the Debtors purchased the cottage from the Hawks through a bill of sale.
Second, Section 12 of the Lease states that “[t]he LESSEE shall at all times keep the leased
premises, together with any buildings . . . free from all liens, mortgages, . . . except as may first be
approved by the LESSOR . . . .” Id. In September, 2006, the Debtors, the Conservancy District, and
the Bank entered into a “Consent and Agreement,” which granted Debtors permission to encumber
their “interest in the lease and/or mortgage upon any residence, building or appurtenant
improvements now or thereafter located on said leased premises . . . .” (Adv. Docket # 48, Trial
Stipulations, Exh. G) (emphasis added). The Consent and Agreement also states that by entering
into such agreement, the Board of the Conservancy District “approves the loan from Lender to
Lessee in the amount of $240,750.00, to be secured by a mortgage upon the Lessee’s interest in the
lease and/or security agreement upon [s]aid residence or other structure a[n]d improvements
appurtenant thereto on the Conservancy District’s lot.” Id. at ¶ 1 (emphasis added). Moreover, “[i]n
the event action is taken by the Conservancy District cancelling or forfeiting such lease, the
Conservancy District will execute a new lease for said lot to Lender . . . for a period equal to the
unexpired term of the cancel[l]ed or forfeited lease . . . .” Id. at ¶ 4.
Third, under Section 18, Debtors’ ownership interest reverts to the Conservancy District in
the event of a default. The Lease states specifically that if the Debtors default by failing to pay any
part of the rent or failing to comply with applicable law, ordinance, rule, or regulation, “all right, title
and interest of the LESSEE in the lease premises shall terminate and cease and shall revert to the
LESSOR, together with the full right of LESSOR to re-enter upon said premises, take and possess
the same, together with all buildings, structures, and improvements thereon . . . .” (Adv. Docket #
48, Trial Stipulations, Exh. A) (emphasis added).
Fourth, under Section 19, ownership of any building or structure on the leased land is held
by the lessee. Section 19 states
4
[a]ny buildings, structures or improvements erected by LESSEE on
said premise shall be the property of the LESSEE . . . and may be
removed by LESSEE, provided all money due or to become due
under this agreement shall have been paid; . . . and provided also that
all liens placed upon the property . . . shall have been satisfied; [and]
provided also that said buildings are removed within thirty (30) days
after termination of this lease for any cause . . . .
Id. (emphasis added).
On September 25, 2006 the Hawks and the Debtors executed an “Assignment and Extension
of Cottage Site Lease,” (“Assignment”) which transferred the Hawks’ interest in their Lease to the
Debtors for consideration of one dollar. The Assignment was recorded in the Richland County
Recorder’s Office on October 3, 2006.
On September 27, 2006, the Hawks and Debtors executed a bill of sale (“Bill of Sale”) that
transferred title to the cottage from the Hawks to Debtors for $105,000. The Bill of Sale was
recorded in Richland County Recorder’s Office on October 3, 2006.
On the same day, the Debtors executed a mortgage in favor of the Bank (“mortgage”). The
mortgage secured payment of a note in the amount of $240,750. On October 3, 2006, the mortgage
was recorded in Richland County Recorder’s Office. Attached to the recorded mortgage is
“Schedule C” which provides a description of the property as follows: “Situated on Lot CM-234 in
the Charles Mills Lake area of the Muskingum Watershed Conservancy District, in the Township
of Mifflin, County of Richland, State of Ohio and covered by Lease #4948-R.” (Adv. Docket # 48,
Trial Stipulations, Exh. F).
On October 15, 2009, the Debtors filed a voluntary petition under Chapter 7. Debtors listed
the cottage as real property on Schedule A stating that the amount of the secured claim was
$235,000.
5
On February 2, 2010, the Trustee filed a complaint “to determine liens.” The Trustee’s
complaint sought to avoid the security interests held by the Bank and the Conservancy District, in
Debtors’ cottage and Lease. The Debtors, the Conservancy District, and the Bank filed answers to
Trustee’s complaint.
On May 28, 2010, the Trustee filed a motion for summary judgment requesting that the
bankruptcy court find that the mortgage was not secured by the cottage or the Lease. The Trustee
argued that the mortgage did not create a perfected security interest in the cottage because the cottage
is a chattel and an interest in chattel can only be perfected by the filing of a financing statement with
the Ohio Secretary of State. In the alternative, the Trustee argued that even if the cottage is a fixture
the bank failed to perfect its interest in the cottage in the manner required by Ohio law. The Bank
argued that the mortgage is valid under Ohio law and creates a perfected security interest in both the
Debtors’ Lease and the cottage.
On August 5, 2010, the bankruptcy court issued a memorandum of opinion and an order
denying Trustee’s motion for summary judgment. The bankruptcy court made two rulings in its
opinion and order. First, the court ruled that the Bank’s mortgage was valid under Ohio law. Second,
the bankruptcy court denied the Trustee’s motion for summary judgment “because the facts, . . .
viewed in the light most favorable to the non-movants, suggest that the cottage is not a chattel
. . . .[a]lthough further investigation of the facts may show otherwise . . . .” (Adv. Docket # 21, p.
9). The bankruptcy court cited a number of factors that supported the conclusion that the cottage was
not chattel, such as: (1) A Property Report Card (“Report Card”) maintained by the Richland County
Auditor’s office which states that the “cottage was constructed on site and never had an independent
identity before it was installed on the property;” (2) The cottage has a basement which “suggests that
it is well-integrated with and would be difficult to remove from the property;” and (3) Section 19 of
the Lease states that Debtor owns the property. Id. The court concluded that whether the cottage
was chattel created a question of fact and scheduled the matter for trial.
6
On June 6, 2011, the bankruptcy court held a trial in this matter. During the trial, the Trustee
presented three witnesses: Donnie J. Borland (“Borland”), lease manager of the Conservancy
District, and both Debtors. The bankruptcy court’s opinion summarized the testimony as follows:
[T]he trustee called Donald Borland, who is the lease manager
for the Conservancy District. He testified that the Conservancy
District leases only the land around Charles Mill Reservoir and
regards the cottages as personal property under the terms of the
Conservancy District’s standard form lease. He also pointed out that
cottages in the Conservancy District are transferred by bill of sale as
opposed to deed. Finally he testified that it was possible to move a
cottage from the leased land. He recalled that, several years ago, a
cottage on land owned by the Conservancy District on Seneca Lake
was moved to private property on the same lake. On cross
examination, Mr. Borland confirmed that the cottage does not have
axles or wheels and is a three-level house with a basement.
Second, the trustee called Mr. Szerwinski. Mr. Szerwinski
testified that at the time he purchased the property he understood that
he was only purchasing the cottage and not the land it sits on. He
testified that he understood that he might be required to move or
demolish the cottage at the end of the lease. He also testified that he
was aware that buildings could be moved and that he had seen a
building moved on television. Third, trustee called Mrs. Szerwinski.
She also testified that, at the time the debtors purchased the cottage,
she understood that they would own only the cottage and not the land.
On cross-examination she confirmed that the cottage is fully-
integrated structure with a basement.
By stipulation of the parties, the trustee also submitted into
evidence the deposition of Earick Earhart, a licensed appraiser. He
testified that he appraised the cottage in August of 2006. (Deposition
at 13). He confirmed that the structure was a fully-integrated, three-
story house. However, he testified that he did not consider the lower
level a basement because it was finished in a way that was similar to
the other two levels of the house. (Deposition at 14). He testified that
the cottage could be moved because “[a]ny structure can be moved.”
(Deposition at 31). He testified that he had never witnessed a
structure being moved but was aware of a historic building in
Ashland, Ohio that had been moved from one side of the street to the
other. (Deposition at 32-3.3). He also testified that, regardless of
whether the cottage was transferred by deed, he considered the
cottage to be real estate as opposed to real property. (Deposition at
48).
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(Adv. Docket # 62, Memorandum of Opinion dated June 27, 2011, p.3). The parties also stipulated
that a Warranty Deed was recorded from C.F. Tucker, et al., to the Conservancy District pertaining
to the land owned by them and upon which the Debtors’ cottage is located. Other than what was
stipulated to by the parties, the Bank did not present any witnesses or evidence during the trial.
On June 27, 2011, the bankruptcy court issued a memorandum of opinion. The bankruptcy
court incorporated its opinion denying Trustee’s motion for summary judgment, and concluded that
the Trustee failed to prove that the cottage is chattel. The court held that the Trustee failed to
produce evidence that the Debtors had any intention to move the cottage; moreover, it was beyond
dispute that the cottage was highly integrated and as such would be difficult to move the structure
from the land. Since the cottage was a fixture, the Bank had properly perfected its mortgage against
the property. Therefore, the Trustee could not avoid the Bank’s security interest and the bankruptcy
court dismissed the adversary proceeding. On July 11, 2011, the Trustee filed a timely notice of
appeal.
DISCUSSION
I. Does the Chapter 7 Trustee have authority to avoid the Bank’s mortgage pursuant to 11
U.S.C. § 544?
The Bank argues that the Trustee never raised 11 U.S.C. § 544 as a claim for relief, therefore
its claim under this section is not properly before this Panel on appeal. Under the “strong arm”
clause of the Bankruptcy Code, 11 U.S.C. § 544(a), a Trustee is entitled to avoid a mortgage that was
not properly perfected. Section 544(a)(3) provides:
(a) The trustee shall have, as of the commencement of the
case, and without regard to any knowledge of the trustee or of any
creditor, the rights and powers of, or may avoid any transfer of
property of the debtor or any obligation incurred by the debtor that is
voidable by–
....
(3) a bona fide purchaser of real property, other than fixtures,
from the debtor, against whom applicable law permits such a transfer
to be perfected, that obtains the status of a bona fide purchaser and
8
has perfected such transfer at the time of the commencement of the
case, whether or not such a purchaser exists.
11 U.S.C. § 544(a)(3). Under § 544(a)(3), the Trustee’s interest in the Debtors’ property is that of
a bona fide purchaser of the property who purchased the property without notice of any prior
encumbrance and recorded his interest on the date the Debtors’ petition was filed.
The bankruptcy court’s docket demonstrates that the Trustee asserted 11 U.S.C. § 544 as the
basis of his claim. Although the Bank is correct that the Trustee does not mention, either in his
initial complaint or in his motion for summary judgment, that he is proceeding under 11 U.S.C.
§ 544; the Trustee cites to 11 U.S.C. § 544 as the basis for his claim in proposed conclusions of law
filed with the bankruptcy court prior to trial. Thus, the Bank was on notice prior to trial that the
Trustee was proceeding under § 544. The Trustee has the authority to avoid the bank’s mortgage
under 11 U.S.C. § 544.
While the Trustee has the power to bring an avoidance action under 11 U.S.C. § 544, the
primary issue on appeal is whether the bankruptcy court erred in ruling against the Trustee on the
merits of the case. The Trustee argues that the court erred in finding that the Bank had properly
perfected its security interest in the cottage and the Lease. If the cottage is “chattel property,” the
Trustee is correct, if the cottage is a “fixture,” the issue is whether the Bank properly perfected its
security interest in a fixture.
II. Is the cottage a chattel or a fixture under Ohio law?
In order for the Trustee to prevail under 11 U.S.C. § 544 and avoid the Bank’s security
interest in the Debtors’ cottage and Lease, the Trustee must first show that the cottage is a chattel,
and not a fixture or real property. If the cottage is chattel, the only means of perfection is the filing
of a financing statement with the Secretary of State. If the cottage is a fixture, a security interest may
be perfected by the filing of a mortgage with the county recorder, so long as the mortgage complies
with the elements of a financing statement under Ohio Rev. Code § 1309.502(c).
9
Whether property is considered a chattel or a fixture, is determined by reference to applicable
state law. Butner v. United States, 440 U.S. 48, 54 99 S. Ct. 914 (1979); see also In re Davis, 386
B.R. 182, 186 (B.A.P. 6th Cir. 2008) (citing Cluxton v. Fifth Third Bank (In re Cluxton), 327 B.R.
612 (B.A.P. 6th Cir. 2005) (applying Ohio law to determine whether a mobile home is real property
or personalty)). Since the Debtors’ cottage is located in Ohio and the mortgage was executed in
Ohio, the issues before the Panel are governed by Ohio Law.
The Ohio Supreme Court in Teaf v. Hewitt, 1 Ohio St. 511, 527, 1853 WL (1853), defines
the terms chattels and fixtures. First, a chattel is defined as movable goods, but also includes goods
that are “for temporary purposes somewhat attached to the land . . . .” Teaf, 1 Ohio St. at 527
(emphasis added). The term “fixture” is defined as an “article which was a chattel, but which by
being physically annexed or affixed to the realty, became an accessory to it and part and parcel of
it.” Id.; see also Ohio Rev. Code § 1309.102(41) (defines fixtures as “goods that have become so
related to particular real property that an interest in them arises under property law.”). Once property
becomes a fixture, the property is treated as part of real property and a security interest may be
perfected by way of a mortgage so long as certain other requirements are satisfied.
In order to determine whether a piece of property has become a fixture, the Ohio Supreme
Court in Teaf established a three-part test:
1st. Actual annexation to the realty, or something appurtenant
thereto.
2d. Appropriation to the use or purpose of the part of the realty with
which it is connected.
3d. The intention of the party making the annexation, to make the
article a permanent accession to the freehold-this intention being
inferred from the nature of the article affixed, the relation and
situation of the party making the annexation, the structure and mode
of annexation, and the purpose or use for which the annexation has
been made.
Id. at 530. This test is still used by courts today. See In re Cluxton, 327 B.R. 612, 615 (6th Cir.
B.A.P. 2005).
10
The first factor, annexation, “has come to be regarded as less determinative of fixture status
than was formerly the case at common law.” Masheter v. Boehm, 37 Ohio St.2d 68 (Ohio App.2d
2009). Slight or constructive attachment is all that is required as long as the other two elements are
established. In re Kerr, 383 B.R. at 342 (citing In re Cluxton, 327 B.R. at 615; Holland Furnace Co.
v. Trumbull Savings & Loan Co., 135 Ohio St. 48 (1939)).
The second factor focuses on whether the property has adapted to the use associated with its
installation and has become “an integral and necessary part of the whole premises [and] ordinarily
. . . would not be taken out or dismantled until it was worn out by use.” In re Jarvis, 310 B.R. 330(Bankr. N.D. Ohio 2004) (citing In re Cluxton, 327 B.R. at 615; Holland Furnace Co. v. Trumbull
Savings & Loan Co., 135 Ohio St. 48 (1939)).
The third factor, intention of the parties, addresses whether the parties intended to make
personal property a permanent fixture. “[I]t is not necessarily the real intention of the owner of the
chattel which governs. [The owner’s] apparent or legal intention to make it a fixture is sufficient”
and that “ought to be apparent form the situation and surroundings.” Holland Furnace Co. v.
Trumbull Savs. & Loan Co., 135 Ohio St. 48, 53-54 (1939). A determination of a parties’ intent is
made by examining the totality of the circumstances. G&L Investments v. Designer’s Workshop,
Inc., No. 97-L-072, 1998 WL 553213, at *5 (Ohio App. June 26, 1998).
Evidence of the parties’ intent may be gleaned from agreements entered into by the parties.
As to the issue of intent, however, an agreement between the parties is not necessarily dispositive.
Jarvis, 310 B.R. at 336. As the bankruptcy court held in Jarvis
an intent to create a fixture also has an objective component in that
for a chattel to be found to be a fixture, it must be affixed to the realty
in such a manner that it will indicate to all persons dealing with the
realty that it was the intention and purpose of the owner of the chattel
to make it a permanent attribute of the realty. Many different
considerations are useful in this regard–for example, the permanent
and impermanent nature of the property, the mode of attachment, and
the relationship between the parties.
11
Id. (internal citation omitted). The parties’ intent can also be inferred from whether the item is
“capable of severance without material harm to the realty” to which it is attached. See Official
Comment to Ohio Rev. Code § 1302.01 (2008).
In its memorandum of opinion, the bankruptcy court applied the three factor test set forth in
Teaf and concluded that the cottage was a fixture rather than chattel. With regard to the first factor,
annexation, the bankruptcy court held that the evidence showed that the “the cottage is highly
integrated with the land” and physically attached thereto. The Property record card indicates that the
home was “constructed on site and never had an independent identity before it was installed on the
property.”2 See Adv. Docket # 48, Trial Stipulations, Exh. H.
As it relates to the second factor, the bankruptcy court considered facts that demonstrate the
cottage had become “an integral and necessary part of the whole premises” making it unlikely that
it would be taken out or dismantled. Borland testified that it was unusual to move a cottage and that
he was aware of only one case in which a cottage was moved. Also, the court concluded that
relocation of the cottage would be expensive. Mrs. Szerwinski’s testimony also revealed that the
home was three levels, did not have wheels, could not be driven off the foundation, and looks like
an integrated structure from the outside.
With regard to the third Teaf factor, that is, the intention of the parties, the bankruptcy court
found that neither the documents nor the testimony at trial proved that the parties intended the
cottage to be chattel.
In this appeal, the Trustee only addresses the third Teaf factor. The Trustee’s arguments may
be summarized as follows: (1) the documents demonstrate an intent to treat the cottage as chattel;
(2) evidence introduced at trial demonstrates an intent to treat the cottage as chattel; and (3) the fact
that the cottage was transferred by bill of sale proves the cottage is chattel. The Trustee first argues
2
The parties specifically stipulated that “[t]he House has a basement and a concrete block
foundation.” (Adv. Docket # 48, Trial Stipulations, ¶ 23, p. 4).
12
that the agreements entered into by the parties, specifically the Lease and Bill of Sale are evidence
that the parties intended to treat the cottage as chattel. The Trustee relies primarily on Section 19
of the Lease. That section states in relevant part:
[a]ny buildings, structures or improvements erected by LESSEE on
said premise shall be the property of the LESSEE . . . and may be
removed by LESSEE, provided all money due or to become due
under this agreement shall have been paid; . . .and provided also that
all liens placed upon the property . . . shall have been satisfied; [and]
provided also that said buildings are removed within thirty (30) days
after termination of this lease for any cause . . . .
(Adv. Docket # 48, Trial Stipulations, Exh. A).
The bankruptcy court rejected the Trustee’s argument that the documents evidenced an intent
to treat the cottage as chattel. The court stated that the documents “send at best mixed signals.”
(Adv. Docket # 62, p. 4). The court noted the Lease distinguishes between the termination of the
Lease by way of a default (Section 18), and termination of the Lease by way of expiration (Section
19). The court stated:
Section 19 of the Cottage Site Lease . . . provides that the debtors may
remove any dwelling they construct within 30 days of the expiration
of the lease. On the other hand, Section 18 treats the cottage as
permanent addition by providing that in the event of default “all right,
title and interest of the LESSEE in the leased premises shall terminate
and cease and shall revert to the LESSOR, together with all buildings,
structures, and improvements . . . .
Id. Because Section 18 of the Lease appears to treat the cottage as a fixture, the bankruptcy court
ruled that the language of Section 19 was not conclusive evidence of an intent for the cottage to be
chattel.
The court also reviewed the testimony of the witnesses and found that the Trustee failed to
show that debtors had any intention to move the cottage. Both Debtors testified and both
acknowledged that they might have to move the cottage in the future, however, there was no “clear
intent to move the buildings from the realty.” (Adv. Docket # 62, p. 4). Moreover, “[a]ny intent that
13
part of the house could be moved, does not change the fact that the entirety of it is attached to the real
property.” Id. (emphasis added).
The Trustee argues on appeal that the fact that the Debtors did not intend to move the cottage
is not relevant and “should have had no significance from a legal standpoint in the Bankruptcy
Court’s finding that the cottage was realty and not a chattel.” (Trustee’s Br., p. 7). The Trustee,
however, provides no legal support for this conclusion and his assertion is contrary to the
requirement that the court look to “other attending circumstances.” Teaf, 1 Ohio St. at 533-534; see
also In re Kerr, 383 B.R. 337, 342 (Bankr. N.D. Ohio 2008) (holding that whether personal property
has become a fixture is made based on the facts and circumstances of each particular case.).
Moreover, the bankruptcy court’s conclusion that there must be “clear intent” is supported by the
holding of the Supreme Court of Ohio in Masheter v. Boehm, 37 Ohio St.2d 68, 74 (1974), finding
that “intent to have the . . . property . . . considered . . . part of the realty must be accompanied by
some positive act or course of action clearly demonstrating this intent . . . .”
The Trustee also argues on appeal that the transfer of the cottage by a bill of sale rather than
by a deed proves that the cottage is chattel property. The testimony at trial was that all prior
conveyances of the cottage were made by bill of sale, and the transfer by bill of sale was at the
request of the Conservancy District. As Borland testified, maintaining ownership in the land “gives
[the Conservancy District] the ability to have some control over the appearance and constructions
around those lakes.” (Adv. Docket # 73, Tr. of Trial held on June 6, 2011, p.16). Since the
Conservancy District is the fee simple owner of the land, it is unclear whether a deed is the
appropriate means by which to convey title in just the physical structure of the cottage. There is no
caselaw supporting the Trustee’s argument that a transfer of property, by a “Bill of Sale”
conclusively establishes that the property is chattel. The Panel finds the fact that the property was
transferred by Bill of Sale is immaterial to its determination of whether the cottage is a chattel or a
fixture.
14
Upon a review of the entire record in this appeal, the Panel affirms the bankruptcy court’s
finding that the Debtors’ cottage is a fixture rather than chattel property. The bankruptcy court
performed a detailed inquiry into the facts presented and applied the correct legal standard. The
court’s findings are not clearly erroneous.
III. Given that the cottage is a fixture, does the Bank’s mortgage satisfy the requirements for
perfecting a security interest under Ohio law?
Under Ohio law, a party may perfect a security interest in a fixture by making a fixture filing.
In re Adkins, 444 B.R. 374, 377 n.4 (Bankr. N.D. Ohio 2011). A fixture filing may be accomplished
by the filing of a financing statement with the secretary of state or by the filing of a mortgage with
the office of the county recorder, as long as it satisfies the requirements for a financing statement
under Ohio Rev. Code § 1309.502(c).3 Such mortgages are effective for the duration of the real
property recording. The requirements that must be met under § 1309.502(c) are the following:
(1) The record indicates the goods or accounts that it covers;
(2) The goods are or are to become fixtures related to the real
property described in the record, or the collateral is related to the real
property described in the record and is as-extracted collateral or
timber to be cut;
(3) The record satisfies the requirements for a financing statement
contained in this section other than an indication that it is to be filed
in the real property records; and
(4) The record is duly recorded.
Ohio Rev. Code § 1309.502(c).
3
In Mason v. Pryor (In re Pryor), 215 B.R. 362 (Bankr. N.D. Ohio 1997), a case under
former Article 9 provisions of the Ohio Uniform Commercial Code, the court held that where a lender
recorded its mortgage on a cottage and other structures only with the county recorder, and not with the
Secretary of State, any secured interest the lender had was avoidable by a Chapter 7 trustee. The Pryor
decision, however, was based on Ohio Revised Code § 1309.38(A)(4), requiring the filing of a
financing statement in the office of the secretary of state and the office of the county recorder. Section
1309.38 was repealed as of July 1, 2001. As discussed above, Ohio Rev. Code § 1309.502(c), now
authorizes the recording of a mortgage only with the register of deeds, so long as the mortgage
complies with the requirements for filing a financing statement.
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In the bankruptcy court’s opinion denying Trustee’s motion for summary judgment, the court
held that the mortgage document satisfies the requirements for a financing statement under Ohio
Rev. Code § 1309.502(c).4 The court held that:
The Trustee argues that the financing statement does not “indicate the
goods or accounts it covers” as required by section 1305.509(C)(1)
because it fails to identify the cottage. But, the trustee is mistaken.
Ohio Revised Code § 1309.108 provides that, subject to exceptions
not applicable here, “any description of personal or real property is
sufficient whether or not it is specific if it reasonably identifies what
it describes.” Section 1309.108(B)(2) provides that a good is
reasonably described by a category and fixtures are a category of
good. Ohio Rev. Code § 1309.102.44(a). Thus, because the
mortgage identifies “all . . . fixtures now or hereafter a part of the
property,”the mortgage “indicates the goods and or accounts it
covers.” Lehman Com. Paper, Inc. v. Official Comm. of Unsecured
Creditors (In re Hawaiian Telcom Commc’ns, Inc.), 2009 WL
2575663, *7 (Bankr. D. Haw. 2009).
(Adv. Docket # 23, p. 8).
Although neither the bankruptcy court, nor the Trustee address the final element of
§ 1309.502(c), that the mortgage be “duly recorded,” the evidence shows that the Bank met this
requirement. The proper place for the recording of a mortgage is with “the office of the county
recorder of the county in which the mortgaged premises are situated and shall take effect at the time
they are delivered to the recorder for record.” See Ohio Rev. Code §§ 5301.23(A), 5301.25,
5310.02. The Bank executed a mortgage to secure its interest in the Debtors’ cottage and Lease and
properly filed it in the office of the county recorder of Richland County, Ohio on October 3, 2006.
The mortgage contained all the requirements of a financing statement. The Panel affirms the
4
In the bankruptcy court’s decision denying trustee’s motion for summary judgment, the court
also addressed certain defects in the mortgage document itself, which the Trustee argued invalidated
the mortgage. Specifically, the Trustee argued that the mortgage document was not valid because it
does not refer to the leasehold interest; does not describe the property other than a post office address;
and indicates that the property is located in Ashland, instead of Richland County, Ohio. The
bankruptcy court held that despite such defects, the description of the property complied with Ohio
law. The bankruptcy court’s opinion after trial deemed these arguments waived sice the Trustee failed
to present any further evidence at trial to support his position. Therefore, these issues are not before
the Panel on appeal.
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bankruptcy court’s finding that the Bank properly perfected its security interest in the cottage by
filing with the county recorder.
IV. Does the Bank’s properly perfected mortgage also secure the Debtors’ leasehold interest?
Trustee argues that the mortgage does not secure the Bank’s interest, if any, in Debtors’
Lease. The Bank argues that it holds a security interest in both the cottage and the Lease. Ohio law
recognizes mortgages on leasehold interests. Abraham v. Fioramonte, 107 N.E.2d 321 (1952). If
a mortgagee properly perfects its security interest in the leasehold, the mortgagee’s lien extends to
whatever interest the mortgagors have in the leasehold. Id. at 326.
The evidence presented at trial shows that when the Debtors executed the mortgage, the
Debtors encumbered their interest in the Lease. The mortgage document itself makes specific
reference to the lease in Schedule C which includes as part of the description of the property being
encumbered, that the cottage is “covered by Lease #4948-R.” (Adv. Docket # 48, Trial Stipulations,
Exh. F). Also, the Consent and Agreement entered into by the Debtors states that the Debtors’ loan
is to “be secured by a mortgage upon [Debtors’] interest in the lease and/or security agreement upon
said improvements.” (Adv. Docket # 48, Trial Stipulations, Exh. G). Finally, the Consent and
Agreement signed by Conservancy District states that the Board of the Conservancy District through
this agreement was giving their approval of the loan with the knowledge that it was “to be secured
by a mortgage upon the Lessee’s interest in the lease and/or [s]aid residence.” Id. The Bank
properly recorded its mortgage, and in doing so perfected its interest in the cottage and in Debtors’
leasehold interest. The Conservancy District acknowledged that the Bank had a security interest in
the leasehold. Therefore, the Panel affirms the bankruptcy court’s ruling that the Bank has a security
interest in both the cottage and the Debtors’ Lease.
CONCLUSION
For the reasons stated above, the Panel affirms the bankruptcy court’s order dismissing the
Trustee’s complaint.
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