KANSAS COMMENT, 1996

This section varies from the Official Text only by defining fixtures in accordance with Kansas case law prior to the adoption of the Uniform Commercial Code. The explicit definition of "fixtures" should not result in any nonuniform decisions. It has not been amended since Kansas adopted the 1972 official text in 1975. It should be noted that 84-9-313 only applies to secured party (personal property) versus a realty interest (owner versus tenant with a lien on a fixture or encumbrancer versus owner with a lien on a fixture). The conflicts are usually a landlord owner versus a tenant's financier, or, a mortgage versus an owner's fixture financier. Secured party versus secured party contests are governed by the other provisions of Article 9, usually 84-9-312, and realty contests are governed by Chapter 58.

By way of a general overview, 84-9-313 overrides 9-201 by providing that a real estate interest (the interest of the owner versus a tenant and a secured party with a security interest in the tenant's property, or the interest of an encumbrancer versus a security interest in fixtures added by the owner) prevails unless 84-9-313 provides otherwise. 84-9-313(7). Next, a construction mortgage prevails over most later security interests involved in the construction project, but loses to a prior security interest who has filed fixture filings. 84-9-313(4)(b), (c), (d), and 84-9-313(5) then provide for a limited class of security interests that beat the construction mortgage, prior perfected secured parties, readily removable equipment or replacement consumer goods, or subordination by the construction mortgagee to the secured party or to the debtor.

Subsection (1). This subsection contains three key definitions applicable to the priority rules governing fixtures as provided in this section. The hallmark of a fixture is that it includes things that are not part of the land and retain their identity as goods, but are so integral or connected to it that a buyer would expect them to pass with the land. The definition of "fixtures" set forth in subsection (1)(a) is not found in the 1995 Official Text. Under this Kansas variation, goods become fixtures when they are so annexed to realty that a reasonable third-party vendee of the real estate would assume that they would be sold as part of the real estate. Although this definition offers some guidance, it may be difficult to apply in given cases. For example, if a supplier sells 50 window air conditioning units to the owner of an apartment building, retains a purchase money security interest covering the $10,000 price of the units, and locally files a financing statement in the real estate records under this section on the assumption that the units are "fixtures," the debtor's trustee in bankruptcy might later persuade the court that the units are so easily removable that they qualify as "equipment" for which central filing was required. Compare Peoples State Bank of Cherryvale v. Clayton, 2 K.A.2d 438, 580 P.2d 1375 (1978), where dairy machinery installed in an existing barn was held to be equipment, not fixtures. The court stated the test for determining whether things were fixtures was 1) the annexing party's original intent, 2) how firmly the goods were attached and the ease of removal, 3) how related the operation of the goods is to the realty, and 4) whether a reasonable purchaser of the real estate, with knowledge of the recorded interests of others of record or in possession, would reasonably expect the property to pass with the realty. Therefore, no fixture filing was necessary in order to perfect the creditor's security interest. The court may well have reached a different conclusion if the debtor had built a dairy barn with the same equipment in it. Instead of being a barn with dairy equipment attached, the building could have been described as a dairy barn. Since the court will consider the intent of the annexing party, it is impossible to be certain of the classification. Given the uncertainty as to whether specific items of personal property remain as "equipment" or become "fixtures" under this subsection, the only reasonable advice for the financier is to make two filings, one for each alternative assumption. That will insure the result and negate the expenses of litigation even if the court agrees that an item is or is not a fixture.

Further aid in defining a fixture can be gleaned from other portions of 84-9-313. 84-9-313(2) excludes "ordinary building materials" from the definition of fixtures. It is apparent that the two by fours in a building will not be fixtures, but slate roofs and vinyl siding may be more questionable. 84-9-313(4)(c) may expand the definition of fixtures by implying that "readily removable factory or office machines, or readily removable domestic appliances" may be fixtures. Fixtures may include any attached item that the buyer might request pass on the sale of the property. Caution would thus suggest the only safe course is to double file for anything of value which is attached to the realty or building.

The definition of "fixture filing" in subsection (1)(b) is important because it makes a cross-reference to 84-9-402(5), which in turn sets forth the formal requisites of a financing statement in order to perfect when the collateral qualifies as fixtures. Most importantly, in a nonuniform provision, 84-9-402(5) requires the financing statement must contain a legal description of the real estate and the name of the record owner of the realty. Although 84-9-203 does not expressly require a real estate description in the security agreement, every prudent fixture financier will include one. The financing statement must be filed with the register of deeds where the realty is located, and the register of deeds must cross-index into the general real estate mortgage records. See 84-9-403(7).

Subsection (1)(c) defines the term "construction mortgage" for purposes of the priority established in subsection (6). The definition is broad enough to cover everything from development of a subdivision to remodeling a kitchen.

Subsections (2) and (3). Subsection (2), which does not vary from the 1995 Official Text, makes it clear that no security interest (as a fixture or otherwise) exists in ordinary building materials incorporated into a structure such as lumber, bricks, glass, etc. If a supplier does not get paid for such materials, the proper remedy is the Kansas mechanic's lien statute, K.S.A. 60-1101 et seq. Of course the supplier could also take a consensual mortgage covering the real estate. This latter option is underscored by subsection (3), which allows the financier to use the real estate mortgage provisions, if an item is a fixture. Again, however, if there is any doubt the security interest should also be perfected following the provisions of the 84-9-400's.

Subsection (4). This subsection, which does not vary from the 1995 Official Text, sets forth the basic priorities of a security interest in fixtures. The most important rule, as embodied in subsection (4)(a), is that a proper fixture filing gives a purchase money financier of fixtures priority to them over a prior interest in the real estate (e.g., a prior mortgagee or landlord) so long as the fixture filing is made within ten days after the property is affixed to the real estate. This ten-day rule is similar to that governing purchase money security interests in equipment under 84-9-312(4), but has not varied from the Official Text which only allows ten days, not twenty. Note that a construction mortgage with work in progress will take priority over this purchase money security interest under subsection 84-9-313(6). In essence, the construction mortgage is treated as the "mother of all purchase money interests" in 84-9-313. 84-9-313(4)(a) interests are also at risk for intervening purchases or financiers, as discussed in (4)(b).

Subsection (4)(b) is a variety of the first in time rule. It provides that an existing perfected security interest in fixtures has priority over subsequent interests in the real estate, provided the fixture interest also had priority over the preceding interest. The fixture filing has to be made before the real estate interests are of record. Subsection (4)(b). For example, if wall-to-wall carpeting (which, let us assume, qualifies as a fixture) is delivered to the debtor and installed on April 5, and the debtor sells the real estate to a purchaser on April 10, the purchaser will have priority to the carpeting unless a fixture filing was made before April 10. In order to gain priority for the fixture filer under subsection (4)(b), the only requirement is that the debtor have an interest of record in the realty (as where the owner of an apartment is purchasing the wall-to-wall carpeting), or be in possession (as where the conditional vendee of the carpeting is the tenant).

Paragraph (4)(c) is a very limited priority provision which will allow the "fixture" financier priority over a construction mortgagee for items which a court might or might not find to be fixtures. These should include things like a bolted down piece of equipment or a replacement dishwasher in a house under construction. It is unlikely a construction mortgagee would be relying on these types of items.

Paragraph (4)(d) provides any existing perfected security interest in fixtures, whether perfected pursuant to the 84-9-400's or under 84-9-313 to defeat a lien creditor and the trustee in bankruptcy. Note that if a court decides the items are goods and not fixtures, however, the provision does not apply, so double filing is still cheap insurance.

Subsection (5). This subsection does not vary from the 1995 Official Text. Paragraph (5)(a) provides that a mere secured party will have priority over competing real estate claimants where the claimant has consented in writing to the fixture interest, or has disclaimed any interest in the fixture. Although the grammar of the paragraph does not require a written disclaimer, it will be easier to prove the disclaimer if it is written. It would appear that both exceptions would apply to anyone, and not just a secured party.

Paragraph (5)(b) is like the game of rock, scissors and paper in favor of the fixture financier. If the tenant installed the fixture in which the secured party has an interest, and the tenant has the right to remove it, the secured party prevails over the landlord. The same is true if the owner of mortgaged property has the right to remove the fixture. If the tenant moves, however, the secured party only has "a reasonable time" to remove the fixture.

Subsection (6). This subsection is also consistent with the 1995 Official Text. Under it, a security interest in fixtures is subordinate to a construction mortgage recorded before the goods become fixtures, if the goods are affixed to the realty during construction. This superpriority applies even though the fixture financier made a proper fixture filing. The priority applies only during the period of construction; a long-term financier is not so protected against subsequent fixture secured parties after the construction is completed. If the fixture financier wants priority as to the fixture over the construction lender, it must deliver the goods after construction is complete, or obtain a subordination agreement under 84-9-313(5)(a) or 84-9-316.

Subsection (7). This subsection, the residuary priority rule, does not vary from the 1995 Official Text. It overrides 84-9-201. As one obvious application, a purchase money supplier of a fixture who fails to comply with the ten-day rule of subsection (4)(a) will be subordinated to an earlier-filed real estate mortgage which contains a "fixtures and accessions" clause.

Subsection (8). This subsection, which does not vary from the 1995 Official Text, sets forth the rules governing foreclosure of a fixture security interest. A secured party with priority may remove the fixture from the real estate, but must comply with the provisions of the 9-500's, including not breaching the peace and giving the required notices. The secured party need not reimburse the debtor for any physical damage done to the realty. If an encumbrancer or third-party owner is in the picture, the fixture forecloser must provide such reimbursement for any damage, but not for any diminution in value. If the cost of repair exceeds the used value of the collateral, the secured party might consider waiving its interest in the fixture. Given such a rule, the fixture financier may choose to back off from its Article 9 remedy and proceed under the Kansas mechanic's lien statute, K.S.A. 60-1101 et seq. In Benner-Williams, Inc. v. Romine, 200 K. 483, 437 P.2d 312 (1968), the Kansas supreme court held that retention of a fixture security interest does not waive the mechanic's lien remedy, at least absent any subsequent effort to foreclose on the fixture. For some strong language in Article 9 which supports the concept of cumulative remedies, see 84-9-501(1) and 84-9-501(4).

Revisor's Note:

Former section 84-9-313 was repealed by L. 2000, ch. 142, § 155 and the number reassigned to the current text.

Law Review and Bar Journal References:

Subsection (1) furnishes same guidelines as to what constitutes a fixture, J. Eugene Balloun, 16 K.L.R. 437 (1968).

"The New UCC Article 9 Amendments," Barkley Clark, 44 J.B.A.K. 131, 172 (1975).

"Changes in Article Nine of the Kansas Commercial Code," Alan Tipton, 15 W.L.J. 212, 213, 214, 215, 216 (1976).

Perfecting security interests in mobile homes, 18 W.L.J. 708, 712 (1979).

"Survey of Kansas Law: Secured Transactions," J. Eugene Balloun, 27 K.L.R. 301, 304 (1979).

"Revised Article 9 in Kansas," Hon. John K. Pearson, 51 K.L.R. 769, 810 (2003).

"A Brief Overview of Revised Article 9 in Kansas," John K. Pearson and J. Scott Pohl, 72 J.K.B.A. No. 8, 22 (2003).

CASE ANNOTATIONS

1. Dairy equipment installed in barn held equipment, not fixture; section not in conflict with common law. Peoples State Bank of Cherryvale v. Clayton, 2 Kan. App. 2d 438, 439, 440, 581 P.2d 399.

2. Leased light poles were personalty which could be removed by lessor without substantial injury to property. In Re Crew's Chrysler-Plymouth, Inc., 5 B.R. 176, 178 (1980).

3. Cited; exclusive methods for perfecting security interest in a mobile home in K.S.A. 84-9-302(3)(c) as described in K.S.A. 8-135(c)(5) examined. Beneficial Finance Co. v. Schroeder, 12 Kan. App. 2d 150, 151, 737 P.2d 52 (1987).

4. Whether first mortgage holder or purchase money security interest in fixtures holder has priority in mortgage foreclosure sale funds examined. Capitol Fed'l Savings & Loan Ass'n v. Hoger, 19 Kan. App. 2d 1052, 1053, 1060, 880 P.2d 281 (1994).

5. Bankruptcy trustee's attempted avoidance of lien on modular home denied; court distinguishes modular homes from mobile homes. In re Brouillette, 389 B.R. 214, 221 (2008).