West Plains defaulted, and the bank repossessed and sold all eight vehicles, applying the net proceeds to the secured obligation. The IRS sued the bank for conversion, claiming that its tax lien had priority over the bank’s security interest.
Under the Internal Revenue Code, a federal tax lien generally has priority over a security interest that attaches after a notice of the lien is filed. See 26 U.S.C. § 6323(a). There are exceptions designed to prevent undue interference with standard commercial financing transactions, see 26 U.S.C. § 6323(c), (d), but no statutory exception for a subsequently created purchase-money security interest (“PMSI”). Nevertheless, the IRS conceded in a Revenue Ruling that a PMSI that is “valid under local law” has priority over a tax lien even if the PMSI arises after a notice of federal tax lien has been filed. See Rev. Rul. 68-57, 1968-1 C.B. 553. See also Slodov v. United States, 436 U.S. 238, 258 & n.23 (1978); First Interstate Bank of Utah v. IRS, 930 F.2d 1521 (10th Cir. 1991). This concession is based on some cryptic legislative history and the belief that the IRS loses nothing by it because, without such a rule, the taxpayer would not receive financing and would therefore not acquire a new asset to which the tax lien could attach.
In this case, however, the bank did not perfect its security interest by sending the required documents to the state titling authority within the 20-day period necessary for the bank’s security interest to have priority over an earlier perfected security interest or an intervening judicial lien. Cf. §§ 9‑317(e), 9‑324(a). Seizing upon this, the IRS argued that the bank’s PMSI was not “valid under local law” within the meaning of the Revenue Ruling, and hence the PMSI was subordinate to the tax lien.
The court ruled for the bank. It concluded that the delay in perfection did not matter because federal law does not incorporate state law on priority (as opposed to attachment and perfection). What mattered, in the court’s view, was that the security interest had to be perfected before the collateral is sold, which it was. 2023 WL 8599389, at *9-11. Accordingly, the IRS had no conversion claim against the bank. There was no discussion of why the federal priority rule would be so much more permissive as to timing of perfection than state law.
The decision is a good one for PMSI sellers and PMSI lenders because it means that a brief delay in perfecting a PMSI will not result in subordination to a tax lien as to which a notice of had earlier been filed. But wait, was there really a delay in perfection in this case?
The court assumed that the bank’s security interest was unperfected until the new certificates of title were issued. However, the bank had been listed on the prior certificates of title as the owner. Thus, at no relevant time did the certificates of title fail to indicate that the bank had an interest in the vehicles, and there is ample authority for the proposition that a secured party that is listed as the owner on the certificate is perfected because that fully serves the notice function of the COT statute. See Brenner Financial, Inc. v. Cinemacar Leasing, 2012 WL 1448048 (N.J. App. Div. 2012); In re Stuewe, 2011 WL 2173694 (Bankr. D. Kan. 2011); In re My Type, Inc., 407 B.R. 329 (Bankr. C.D. Ill. 2009); In re Drahn, 405 B.R. 470 (Bankr. N.D. Iowa 2009). Contra In re Global Environmental Services Group, LLC, 2006 WL 980582 (Bankr. D. Haw. 2006). Perhaps no one thought to make this argument.
MS Services, LLC v. Calabria,
This case is about the respective scopes of Articles 2 and 9 and their effect on the statute of limitations. The facts are fairly simple.
In 2005, the debtor bought a yacht, financed in part with a 20-year secured loan from a lender. For the next 11 years, the debtor made the required payments. The lender then received notification of a threatened sale of the yacht by the marina where the yacht was stored. This constituted a default under the loan agreement. In response, the lender repossessed the yacht on December 5, 2014 and sold it on April 8, 2015, resulting in a deficiency. After that, the lender sued for the deficiency. At some point in the process, the lender assigned the debt to a collection agency. After a hearing, the trial court dismissed the lender’s deficiency claim for “failure to repossess and sell the yacht in a commercially reasonable manner,” id. at *3, and dismissed several counterclaims that the debtor had brought. One of those counterclaims, for wrongful repossession, had been asserted against the lender and the collection agency. Two others, for breach of contract and breach of the implied covenant of good faith, had been asserted against the lender only, and were based on allegations not reported in the opinion.
The debtor appealed the dismissal of the counterclaims. The appellate court affirmed, ruling that all three counterclaims were barred by the 4-year statute of limitations in § 2‑725 because they were first asserted on November 10, 2019, more than four years after the repossession and sale of the yacht. Id. at *4-5.
This is incorrect because § 2‑725 was not applicable to any of the counterclaims. The limitations period in § 2‑725 applies to a claim for breach in a contract for the sale of goods. Although the debtor did incur the secured loan in connection with a contract for the sale of goods, the lender was not the seller. Hence there were two different contracts: one for the sale of goods and one for financing. See 2024 WL 762239, at *1 (indicating that the debtor signed loan documents consisting of a promissory note, security agreement, and disclosure statement). Thus, as to the counterclaims from breach of contract and breach of the implied covenant of good faith, § 2‑725 did not and could not apply.
To be clear, if the yacht seller had sold the vessel on credit and assigned the resulting right to payment, any breach of contract claim made by or against the assignee arising from that transaction likely would be subject to the limitations period applicable to a contract for the sale of goods. See, e.g., Kaiser v. Cascade Capital, LLC, 989 F.3d 1127 (9th Cir. 2021) (an assignee’s action to collect a deficiency owing after disposition of goods purchased under a retail installment sale contract was subject to Oregon’s four-year statute of limitations for claims under U.C.C. Article 2, rather than the state’s six-year limitations period for other contract claims). See also Coastal Federal Credit Union v. Brown, 790 S.E.2d 417 (S.C. Ct. App. 2016) (assignee’s suit for a deficiency after repossessing and selling a vehicle was subject to the six-year limitations period applicable to an action relating to a sale of goods, not the three-year limitations period applicable to debt collection generally); Complete Credit Solutions, Inc. v. Cianciolo, 2012 WL 5504875 (D. Mass. 2012) (the limitations period on a deficiency claim of a secured party that was the assignee of a seller of goods was the four-year period under Article 2, not the six-year period under Article 9). But this case apparently did not involve an assignment of the sales contract.
Absent an applicable exception, the New Jersey limitations period for any action for breach of contract is six years, See N.J. Stat. § 2A:14‑1(a). But whatever the limitations period might be in New Jersey on a claim for breach of a loan agreement, it is not found in § 2‑725.
Section 2-725 was also inapplicable to the counterclaim for wrongful repossession, and would be even if, contrary to the facts here, the secured party had been the seller’s assignee. Wrongful repossession is a tortious injury to property (specifically probably either trespass to chattels or conversion). It is not a breach of contract at all – at least not a breach of any contract provision that is apparent from this case’s opinion or otherwise to be expected. Although the loan agreement did provide that the lender would “have all the rights of a secured party under the Uniform Commercial Code,” this is little more than a careful confirmation of § 9-601(a) (secured party after default “has the rights provided in this part”). It is not an incorporation into the contract of the cause of action in tort, let alone an agreement to subject the cause of action in tort to a contractual limitations period.
In re Evans,
This case is about the meaning of the term “fixtures.” The court reached the correct result, but its analysis was fundamentally flawed in a way that is all too common.
In 2018, the debtor bought a house in New Mexico. The following year, a creditor obtained a judgment against the debtor in Colorado, which was domesticated and recorded in New Mexico in 2020. In 2023, the debtor purchased a solar panel system subject to a purchase-money security interest (“PMSI”) and had the system installed on the house. A few months later, the debtor filed for bankruptcy protection. In the bankruptcy case, the debtor sought to avoid the judicial lien on his homestead. In connection with that, it apparently became important to determine whether the security interest created in the solar panel system extended to the real property.
In addressing this question, the court concluded that the solar panel system was not a fixture because: (i) the system was merely bolted onto the roof and could easily be removed without damaging the roof; (ii) the system was not adapted to the purpose of the roof and would function as well if installed in a yard; and (iii) the agreement with the lender stated that the parties intended for the system not to become fixtures. Id. at *4-5. Moreover, the court reasoned, treating the system as fixtures would impel lenders that finance such systems to make fixture filings to preserve their priority, adding an expense that would be contrary to the laudable policy of reducing the cost of solar energy. Id. at *6. As a result, the lender with the PMSI in the system did not have a lien on the house that would affect whether the judgment lien impaired the debtor’s homestead exemption.
The decision is mostly correct. However, in laying the groundwork for its analysis, the court wrote that “if the System was permanently affixed to the House, then for the purposes of the New Mexico Uniform Commercial Code, it would no longer be consumer goods, but instead would have become ‘fixtures.’ ” Id. at *3. That is a false dichotomy. Fixtures are goods. Indeed, the definition of “fixtures” in § 9‑102(a)(41) – which the court quoted – provides that fixtures “means goods that have become so related to particular real property that an interest in them arises under real property law” (emphasis added). Thus, the fact that goods become fixtures does mean they cease to be goods. It means merely that the goods straddle the line between personal and real property, and are simultaneously subject to the law governing both. Thus, a consensual lien in a fixture might arise either under personal property law (through Article 9) or real property law (through the law of mortgages). See § 9-334(b).
Because fixtures are goods, they must also be one of the four mutually exclusive subcategories of goods: consumer goods, equipment, farm products, and inventory. All goods are one of the subcategories. See § 9-102 cmt. 4.a. In short, when consumer goods become fixtures, they remain consumer goods for the purposes of Article 9 even though a security interest can also be created under real property law.
The court then made another misstatement. It wrote that if the system had become fixtures, “the lender would have to file a fixture filing to keep its perfected, first priority security interest.” Id. at *6. To the extent that this statement is about perfection, it is wrong in two respects. First, because the solar panel system remained consumer goods even after the system became fixtures, the lender’s PMSI remained automatically perfected without the filing of a financing statement. See § 9‑309(1). Second, even if the lender did need to file a financing statement for the lender’s PSMI to remain perfected, there would still be no need for a fixture filing. A security interest in fixtures can be perfected by filing a financing statement in the central office of the jurisdiction where the debtor is located or by filing a fixture filing. See § 9‑501(a)(2) (filing centrally is effective even if “the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing”). See also §§ 9‑301 cmt. 5.b, 9‑501 cmt. 4.
Perhaps what the court meant was that, for the lender to be sure that its PMSI will have priority, the lender would need to make a fixture filing. Indeed, to be assured of priority, the lender would generally need to make a fixture filing unless the fixtures were replacements of domestic appliances that are consumer goods. See § 9-334(d), (e). However, reading the court’s statement in context, it seems evident that the court was talking about both perfection and priority, not merely about priority.
The moral of this is simple. Goods remain goods even after they become fixtures. Any method for perfecting a security interest in the goods that would be effective if the goods were not fixtures remains effective after the goods become fixtures. Moreover, it does not matter whether that perfection step is taken before or after the goods become fixtures. A fixture filing is an alternative method for perfecting a security interest in goods. And while a fixture filing is sometimes needed to ensure priority, it is never the sole method for perfecting a security interest in the fixtures.
