Daily Development for Friday, February 23, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; PRIORITY: Timber deed of trust has priority over subsequent UCC filing.

 Feliciana Bank & Trust v. Manuel & Sessions, L.L.C., 943 So. 2d 736 (Miss. 2006).

Feliciana Bank & Trust Company loaned money to Ducote and secured the loan by a deed of trust on land in Wilkinson County, Mississippi. Ducote subsequently contracted to sell the timber on the land to Manuel & Sessions, L.L.C. (there are some factual questions about whether Manuel & Sessions was the real purchaser, but those questions are not relevant to the real property issue.)

Manuel & Sessions cut and sold the trees and paid the proceeds from the sale to Ducote and others involved in the cutting. Ducote did not apply the proceeds from the sale to his loan.

The bank subsequently foreclosed on the land. The proceeds of the foreclosure sale were less than Ducote's indebtedness to the bank. The bank brought an action for waste against Manuel & Sessions.

Although there are numerous cases decided prior to the enactment of the UCC which followed the common-law rule that the timber remains part of the realty until severed, there are no cases in Mississippi that address this issue after the enactment of the UCC.

Manuel & Sessions argued that, under the Uniform Commercial Code as in effect in Mississippi ("UCC")(all relevant provisions of the UCC are the uniform versions), the security provided by the bank's deed of trust was extinguished as to the timber when Ducote signed a contract to sell the timber.   They claimed that the UCC changed the law and that once a contract for the sale of the timber existed, the only way for the bank to obtain security interest in the timber was to file a financing statement. The bank asserted that it had filed a financing statement, but the court characterized the bank's compliance with the UCC as "questionable."  The trial court held that once the contract had been signed, the UCC cancelled the bank's interest in the timber under the deed of trust, and the only way for the bank to perfect a security interest in the timber to be cut was to file a financing statement. Since the bank's deed of trust apparently did not meet the requirements of a financing sta

tement covering timber to be cut, the trial court reasoned, the buyer took free of the bank's interest.

The definition of "goods" in Article 9 of the UCC includes "timber to be cut and removed under a conveyance or contract of sale." Subsection (2) of Section 2-107 of the UCC provides in relevant part, "A contract for the sale apart from the land of timber to be cut is a contract for the sale of goods within this chapter even though it forms part of the realty at the time of contracting," Subsection (3) of Section 2-107 provides, "The provisions of this section are subject to any third party rights provided by the law relating to realty records, and the contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the buyer's rights under the contract for sale."

On appeal the Mississippi Court of Appeals reversed the trial court on this issue. Once a lender has filed its deed of trust on the land and timber, the execution of a contract to sell the timber does not cancel the lender's interest; rather, the purchaser of the timber takes subject to the lender's deed of trust. The UCC does not evince any intent to terminate the interest of an existing deed of trust in the timber. Section 9-2-107(3) of the UCC indicates that the intent was that the existing interest in the timber created by the deed of trust would continue and maintain its priority in the timber to be cut after the contact to sell was signed.

Reporters Comment 1:  The Reporter did some quick research under Section 2-107 of the UCC, and this case appears to be one of first impression on this issue. The reason for this may be that the result should be obvious; any other result would greatly diminish the value of timber lands as collateral. The intersection between the UCC and real property law in this context is sufficiently murky, however, that able defense counsel was able to convince an experienced trial judge to reach a different result in this case.

Reporters Comment 2:  In addition to filing a financing statement, a lender loaning money secured by timber lands can protect itself by making sure that its deed of trust also qualifies as a financing statement covering timber to be cut. The UCC expressly contemplates in Section 9-502 (c) that a deed of trust can serve as a financing statement covering timber to be cut, as well as as-extracted collateral, and also serve as a fixture filing. It is important, however,  to distinguish between a deed of trust serving as a financing statement and a fixture filing. When a deed of trust serves as fixture filing, the fixture filing does not lapse until the deed of trust is cancelled. UCC 9-515(g). A deed of trust that also is a financing statement covering timber to be cut or as-extracted collateral is subject to the general five-year lapse rule as to that type of collateral.

Reporters Comment 3:  In this case Manuel & Sessions did not file a copy of its contract. Would that have made a difference? Under the court's ruling, the result in this case should have been the same. If the purchaser had filed a copy of its contract, and then a judgment was filed against the owner/seller of the timber before the sale is finalized, would the filing of the contract permit the purchaser to take free of the judgment?

Reporters Comment 4:  The statement in Section 2-107(3) that the buyer can protect itself by filing the contract for sale in the land records raises a number of questions. Is the buyer protected if it files only a memorandum of the contract rather than the contract itself? The seller and buyer may want to keep the financial terms of a contract confidential. What if the buyer filed a financing statement in the land records giving notice of the sale-would that be sufficient? Also, how does this statute work with other statutes that require that every instrument to be recorded in the land records must meet certain requirements? For example, Mississippi requires that every instrument to be recorded in the land records must identify the preparer of the instrument, show the indexing instructions so that the instrument can be properly indexed, and be acknowledged by a notary public. A typical contract for sale of timber would not meet these recording requirements. Is there any possibili

ty that such a contract would be considered a "record" under Section 9-516 of the UCC, which limits the grounds on which a clerk can refuse to record a document?

Reporters Comment 5:  The Feliciana court stated, "Under the UCC, though, if a typical deed of trust is executed after a contract for the cutting of the timber has been executed but before the actual harvesting of the trees, the deed of trust will either not apply to the timber at all because the timber is now personalty, or else the deed of trust will be subordinate to a prior UCC filing." If the owner of the land and a buyer execute a contract for sale of timber, but do not file the contract (or otherwise give notice of their contract) before a deed of trust is filed, shouldn't the beneficiary of the deed of trust have priority? Would it make a difference if an inspection of the property would have shown evidence that someone was about to cut the timber?

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