Problem.Fixtures

     Trade School arranged a loan from Bank of Commerce to finance the acquisition and installation of new chairs, student work space, and carpeting for its classrooms. The chairs were moveable; in fact, they even swiveled. The student work space consisted of several rows of continuous desktop, at the appropriate height for a seated student, bolted to the floor, perhaps not unlike the desktop in your law school classrooms.  Built into each row of desktop were electric and network outlets for the connection of laptop computers. The carpeting was commercial grade, in warm colors, treated to resist food and coffee stains, although we can't think of any sense in which these facts are relevant to this problem.

     Bank of Commerce secured its loan with a security interest in the chairs, work space, and carpeting. The chairs are  personal property and the carpeting is a fixture. One would have to consult the appropriate state's law to determine whether the work space, once installed, is a fixture. See U.C.C. 9-102(a)(41).  Let us assume that the installed work space would be a fixture .  What should Bank of Commerce file? Where?  See Commentary.Perfection as to fixtures. 

     (A) Suppose that Trade School owns the real property on which it conducts its business. The real property stands as security for an earlier loan from Bank of Bismark. Trade School defaults on its payment obligations to Bank of Commerce. How valuable is Bank of Commerce's collateral likely to be? May the Bank of Commerce repossess its collateral?  U.C.C. 9-609, U.C.C. 9-604(c), U.C.C. 9-334(d). 

     (B) Again, suppose that Trade School owns the real property on which it conducts its business and that the real property stands as security for an earlier loan from Bank of Bismark. Trade School defaults on its payment obligations to Bank of Bismark and the Bank of Bismark initiates non-judicial foreclosure under the power of sale in a deed of trust. Are these events likely to constitute a default under the security agreement between Trade School and Bank of Commerce? See our sample security agreement. Will the chairs be the subject of the Bank of Bismark's foreclosure sale? What about the carpeting and the work space? Will the purchaser take subject to the lien of Bank of Commerce?  May Bank of Commerce repossess its collateral after the foreclosure sale?  Would your conclusion differ if Trade School were a tenant under a long term lease, the real property is security for a debt owed by the landlord to the Bank of Bismark, and the landlord's default has led to the non-judicial foreclosure sale?  U.C.C. 9-334(d). 

     (C) Again, suppose that Trade School owns the real property on which it conducts its business, but that the real property does not stand as security for any obligation. Suppose that the Bank of Commerce holds a purchase-money security interest in the chairs, work space, and carpeting, and suppose that Bank of Commerce filed a financing statement in the correct location for a filing on equipment but did not make a fixture filing in the real estate records.  Thereafter, suppose that a former student obtained a $50,000 judgment against Trade School for false advertising and recorded an abstract of the judgment in the county in which the real property is located.  As between Bank of Commerce and former student, who would have a superior interest in the chairs, work space, and carpeting?  U.C.C. 9-334(e), U.C.C. 9-501(a), Official Comment 9 to U.C.C. 9-334. 

     (D)  Again, suppose that Trade School owns the real property on which it conducts its business, but that the real property does not stand as security for any obligation. Suppose that the Bank of Commerce holds a purchase-money security interest in the chairs, work space, and carpeting, and suppose that Bank of Commerce filed a financing statement in the correct location for a filing on equipment but failed to make a fixture filing. Trade School files a Chapter 11 petition and the debtor-in-possession seeks to treat Bank of Commerce as an unsecured creditor in its plan of reorganization. Bank of Commerce objects. Who prevails?  Bankr. Code 544(a)(1), (a)(3), U.C.C. 9-334(e)(3). 

     (E)  Again, suppose that Trade School owns the real property on which it conducts its business and that the real property stands as security for an earlier loan from Bank of Bismark. Trade School defaults on its payment obligations to Bank of Bismark but files a Chapter 11 petition to fend off a foreclosure sale.   How should a plan of reorganization treat the two banks?