© 2009 Dechert LLP Is Your Security Over Fixtures Fiction? Jeffrey M. Katz Partner, Dechert LLP

1 Fixtures and Lien Priorities What are Fixtures? –UCC § 9-102(41): [G]oods that have become so related to particular real property that an interest in them arises under real property law. Why is it important to know if a Good has become a Fixture? General Rule –UCC § 9-334(c): Subject to limited exceptions, a security interest in fixtures is subordinate to a conflicting interest of an encumbrancer or owner of the related real property other than the debtor. Under the general rule, a security interest in fixtures previously perfected by a UCC-1 financing statement properly filed with the appropriate Secretary of States office will lose to a later-filed mortgage on or other recorded interest in the real property. What about First-in-Time, First-in-Right? What the Fixtures Lienor Must do to Prevail –2 Major Exceptions to General Rule Prior Fixture Filing Purchase-Money Security Interest

2 Fixtures and Lien Priorities (contd) UCC-1 Filing Secretary of States Office Fixture Filing Local real property records; office where mortgage would be recorded Prior Fixture Filing – UCC § 9-334(e) –If the fixture filing is recorded in the real property records before the competing real property interest, the fixtures lienor will prevail (first-in-time, first-in-right) Purchase Money Security Interests – UCC § 9-334(d) –The secured obligation represents the price of the [fixtures] or…value given to enable the debtor to acquire [the fixtures]…UCC § 9-103(a)(2) AND –The security interest in the fixtures is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter. UCC § 9-334(d)(3) So, in the case of a PMSI on the fixtures, even if the conflicting real property interest arose and was recorded prior to the creation of the security interest in the fixtures, the fixtures lienor prevails.

3 So Related to Particular Real Property Is it a Fixture? –Some variation in state-by-state analysis, but following factors common: Has it been attached in a permanent manner? Is it adaptable to the propertys intended use? Will its removal damage the property? Intent of the parties Some relevant precedent: In re Williams, 381 B.R. 742 (2008) (home guttering system held not to be a fixture under UCC Article 9; court found that, since gutters wear out and require replacement and their removal would not extensively damage the property, they are not fixtures) Brown v. Blake, 161 S.W.3d 298 (2004)

4 Solar Panels Solar Panels as Fixtures? –A question of growing relevance; current application of fixtures issue Will depend upon how they are attached to roof, extent of damage caused on removal, and contractual characterization, if any –certainly adopted to use of realty if it will supply power –Some related precedent Energy Control Services v. Arizona, 658 P.2d 820 (1982) (solar water heater held to be a fixture under similar test under unrelated statute) In re Arlett, 22 B.R. 732 (1982) (solar water heater held to be a fixture under UCC Article 9; was attached to roof by bolts and plumbing and deemed permanent)

5 Priority vs. Construction Mortgagee UCC § 9-334(h) – unless the PMSI fixture filer filed before recordation of the construction mortgage, a construction mortgagee defeats the PMSI fixture filer, so long as the fixtures are attached prior to the completion of construction. Usual rule protecting PMSI fixture filers does not apply here. A solar panel manufacturer supplying into a construction project should ensure that its fixture filing is made prior to filing of construction mortgage (or make appropriate contractual intercreditor arrangements), or else it wont have the senior lien in its supplied solar panels. If FF made here, FF liens win (§9-334(e)) Construction loan recorded If FF made here, construction mortgagee wins (§9-334(h)) Panels attached to houseCompletion of construction