by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
MORTGAGES; PRIORITY; FIXTURES: Mortgagee has priority to rights in fixtures over installer of fixtures, based on the common law rule that a fixture becomes part of real property; thus, the mortgage covers all such fixtures, even though such fixtures were installed after the date of the mortgage, and even though the mortgage does not specifically reference fixtures, and persons who remove them in contravention of this right are liable to mortgagee. K&L Distributors, Inc. v. Kelly Electric, Inc. 908 P.2d 429 (Alaska 1995).
An electrical supplier performed work at a decrepit warehouse, installing electric fixtures in order to upgrade the property. Owners of the property had purchased the property from mortgagee, who had taken a deed of trust in the amount of the unpaid balance of the purchase price. When the property owners realized they could not pay the electrical contractor, they allowed the electrical contractor to remove equipment, including "disconnects, circuit breakers and light fixtures." All wiring was left intact and only four nuts were loosened in order to remove this property. Nonetheless, the Supreme Court of Alaska held that as the electrical equipment was intended to be installed as fixtures (such decision based on common law), the electrical equipment became part of the realty. The deed of trust stated that it provided a security interest in the real property, "together with the tenements, herediments and appurtenances thereto, thereunto belonging or anywise appertaining." Thus, although fixtures were not directly mentioned in the mortgage and even though the fixtures were not installed until after the date of the mortgage, the court held that the fixtures had become part of the realty and were thus were part of the security held by mortgagee, allowing mortgagee to have priority over the electrical contractor, who stood as an unsecured creditor.
The mortgagee had foreclosed and bought at the sale. Now it was suing the contractor for damages. The trial court dismissed the complaint. The appeals court here reinstates it.
Comment 1: The doctrine is pretty much standard, though some folks don't think of it when they make valuable improvements to mortgaged property.
Comment 2: Here we had a mortgage for the purchase price. The facts indicate that the borrowers invested over $800,000 beyond that in renovating the premises. The court does not analyze whether the security interest of the mortgagee was signficantly impaired by removal of the electrical equipment. Should not that be the standard?
Consider, for instance, the situation arising if the lender had "bid in the debt" and had no deficiency claim. But the fixtures had independent value and could have been removed and sold separately if they'd been there when the lender got the property. Are there damages? The view of the editor would be "no." The fixtures were part of the security, and the damages are for waste, not conversion. No security interest and no deficiency - no damages.
Of course, the situation might be different if the mortgagee had been unaware of the absence of the fixtures at the time it bid.
Comment 3: The court notes that the electrical equipment was not installed by or on behalf of a tenant, but by the owner/borrower. Had the tenant installed the equipment, it might have been regarded as a "trade fixture," which is not really a fixture at all.
Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.
Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.