It has been said that a smart person learns from their mistakes and a wise person learns not only from their own mistakes, but also from the mistakes of others. With this old adage in mind, this blog will address common legal errors and misunderstandings in the industry.

Fixture filings is one of the most misunderstood areas of secured transactions. Indeed, I have seen many improper fixture filings in my career. In this article, I will address five peculiarities and attendant misunderstandings regarding fixture filings.

(1) Contents and Location of Fixture Filing

Most industry veterans know that a “fixture filing” must be made in the office in which a mortgage would be filed on the real estate, with the exception of Louisiana.1  U.C.C. § 9-310(a); U.C.C. § 9-501(a)(1)(B) and U.C.C. § 9-502(b). Surprisingly, however, many people are not familiar with all the additional information that must be included in a fixture filing, and thus many fixture filings are filed without all the necessary information, potentially rendering the fixture filing invalid. A fixture filing must, in addition to including all the usual UCC-1 information, state that it covers fixtures, be filed in the real property records, provide a sufficient description of the real property such as would be required in the jurisdiction at issue (i.e., lot and block: metes and bounds description is not required), and provide the landlord or other record owner’s name if the debtor does not have an interest in the real property. U.C.C. § 9-502(b). All of this information is provided by fully and properly completing boxes 13, 14, 15 and 16 of the standard UCC-1.

(2)  A Mortgage As a Fixture Filing

A mortgage that satisfies the information requirements set forth is also effective as a fixture filing. U.C.C. § 9-502 (c). Notably, a mortgage filed in lieu of a UCC-1 may be effective for a much longer period of time than a UCC-1. While a UCC-1 filing expires after five years unless extended, a mortgage is good until released, which obviously can be far longer than five years.

(3) Trade Fixtures

A filing for certain trade fixtures, to wit, readily removable equipment and machinery, does not need to be filed in the office in which a mortgage must be filed: A regular, centrally filed financing statement is sufficient. U.C.C. 9-334 (e) (2). A secured party retains priority in trade fixtures so long as it has perfected its lien for non-fixture goods before the goods became fixtures.2

The determination of whether an item is a trade fixture or a non-trade fixture is often fact-sensitive and may be costly to prove. Accordingly, a secured party should file a fixture filing whenever it is unsure whether the collateral is a fixture, especially since it may make a precautionary filing without the filing being regarded as an admission.3

PRACTICE TIP: Thus, there are three ways to file against fixtures. For non-trade fixtures, a fixture filing or mortgage satisfying the requirements of a fixture filing must be filed. For certain trade fixtures, an ordinary filing is all that is required.

(4) A PMSI In Fixtures

To have a Purchase Money Security Interest (“PMSI”) priority over pre-existing liens, a fixture filing must be made before the goods became fixtures or within twenty days thereafter, and the debtor must either have an interest in the real property or be in possession it.4 However, a PMSI in fixtures is not superior to a subsequently obtained interest unless the PMSI is actually of record before the subsequent lien. In other words, the PMSI 20 day grace period does not have the same effect in the case of fixtures as in the case of goods.5 Thus, with fixture filings, secured creditors should generally not rely on the 20 day grace period, but rather should file prior to the goods becoming affixed. Moreover, even a properly filed PMSI in fixtures will be junior to a construction mortgage or a permanent mortgage if the permanent mortgage was provided to refinance the construction mortgage.6 But the priority of the construction mortgage is limited to goods that become fixtures during the construction process. If the goods become fixtures after the construction process, the PMSI in fixtures will have priority.

(5) Creditor’s Rights Without A Fixture Filing

The secured party may be able to prevail on its claim against a fixture, even if it is not perfected as provided above, under certain circumstances. In short, even the unperfected secured creditor has a superior right to fixtures, if “the debtor has a right to remove the goods as against the encumbrancer or owner.”7 Thus, where the debtor’s real property lease provides that it may remove trade fixtures at the conclusion of the lease, which is quite common, this right inures to the benefit of the secured party.8 Indeed, this right of the secured party continues for a “reasonable time” even after the debtor’s right to remove the goods is terminated, such as where the landlord evicts the lessee.9

Finally, Article 9 expressly authorizes landlord and mortgagee waivers, which apply regardless of the secured party’s perfection. Of course, the unperfected secured creditor will not, however, be protected in the event of a bankruptcy filing by the debtor.10

Endnotes:

1     In Louisiana, a fixture filing must meet all of the requirements of Section 9-502 (a) and (b) but it need only be filed in the regular UCC index, not the real property records.

2     U.C.C. § 9-334(e)(2).

3     U.C.C. § 9-502, Official Comment 6.

4    U.C.C. § 9-334(d).

5    U.C.C. § 9-334(e)(1).

6    U.C.C. § 9-334(h).

7    U.C.C. § 9-334(f)(2).

8     Id.

9    U.C.C. § 9-334(g).

10     Id.