Morris v. Ark Valley Credit Union (In re Gracy), 522 B.R. 686 (Bankr. D. Kan. 2015) –

A chapter 7 trustee sought to avoid a credit union’s security interest in a manufactured home by asserting his strong arm powers as a hypothetical lien creditor based on the lender’s failure to perfect its lien. The bankruptcy court declined to avoid the lien since it held there was no lien to avoid.

Under applicable state law a manufactured home is generally considered personal property. The proper method for perfecting a security interest when the home is personal property is to obtain a notation of the security interest on the certificate of title.  There is also a mechanism for converting a manufactured home from personal property to real property:  (1) it must be affixed to a foundation, and (2) the certificate of title must be eliminated pursuant to statutory  procedures. A mortgage will perfect the lien on a manufactured home that is real property.

In this case the debtor obtained two home equity loans, each secured by a mortgage that covered the real estate along with any improvements and fixtures. Neither party took steps to eliminate the certificate of title. So, the manufactured home was considered personal property.

In an unusual twist, the lender denied that it even took a lien on the manufactured home. The trustee vigorously opposed this position because he wanted to avoid the lien so that it could be preserved for the bankruptcy estate. (In other words, the bankruptcy estate would step into the shoes of the lender in making a claim to the collateral and its proceeds.)

While acknowledging that the security interest was not perfected since there was no notation on the certificate of title, the bankruptcy court raised the threshold question of whether the credit union had successfully created a security interest that attached to the manufactured home in the first place.

A mortgage can serve as a security agreement as long as it meets the requirements of Article 9 of the Uniform Commercial Code (UCC). Among other things, it must reasonably identify the collateral.  A super generic description such as “all assets” is not a sufficient description for purposes of a security agreement (in contrast to the description of collateral required for a financing statement).  However, generally it is sufficient if the security agreement lists types or categories of collateral.

As described in the mortgage, the collateral consisted of the land “TOGETHER 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.”  There was no specific reference to the manufactured home.  One might expect that it would be covered as an improvement or a fixture.  However, the court determined that this was a “consumer transaction” involving “consumer goods.”  In that circumstance a description by collateral type is insufficient and a more specific description is required.

Since the mortgages did not contain an adequate description of the manufactured home, the lender’s security interest did not attach. This meant that, regardless of the failure to perfect, there was no lien to avoid.

Most lawyers are probably be aware that there may be an issue of whether a manufactured home is personal property or real property, which raises the related question of the proper procedure for perfecting a security interest. However, the additional matter of special UCC requirements applicable to consumer goods as collateral is not as widely discussed and may come as a surprise to many.