Real vs. Personal Property: Lender Screw-Up Leaves It Holding The Bag On Voided Mortgage Purportedly Secured By Manufactured Home

Lexology reports:

• The case of In re Dickson, 655 F.3d 585 (6th Cir. 2011) centered on the status of the debtor’s manufactured home under Kentucky law. In Kentucky, a manufactured home is considered personal property. As such, in order for a lien to be effective, it must be noted on the certificate of title.



• A manufactured home may be converted to real property, however, if the owner files an affidavit that states it is permanently affixed to real estate and then surrenders title.



• In In re Dickson, the debtor purchased a manufactured home with the proceeds from a bank loan. From the loan transaction, the bank took a lien on all of the debtor’s real property, including any current and future improvements. Although the clause did not expressly refer to the debtor’s personal property, the debtor admitted in her deposition that she assumed the lien would apply to her newly purchased home when she was granted the mortgage. The bank promptly recorded its lien.



• On June 15, 2006, the debtor defaulted and the bank initiated foreclosure proceedings. In these proceedings, the bank requested an order stating that the manufactured home had been converted to real property; a request that was unopposed. Even though the bank had neither a lien on the manufactured home’s certificate of title nor an affidavit converting it to real property, the court declared the home to be converted to real property on June 7, 2007.



• A month later, the debtor filed a petition for relief under Chapter 13 of the Bankruptcy Code. The bank sought relief from the automatic stay to foreclose on the manufactured home. But the debtor opposed this motion, arguing that the bank’s lien on the home was avoidable as a preferential transfer. Both the district court and the Bankruptcy Appellate Panel found for the debtor and avoided the bank’s lien interest in the manufactured home.(1)



• On appeal, the Sixth Circuit affirmed. The court noted that, under Sections 522(g)(1) and 547of the Bankruptcy Code, a Chapter 13 debtor may avoid a lien if, among other things, it resulted from an “involuntary” transfer that occurred within the ninety-day period that precedes the filing of a bankruptcy petition.



• Here, the Sixth Circuit found that the transfer was involuntary because it occurred by operation of law. Although the mortgage on real property was granted by a voluntary agreement between the bank and the debtor, the bank’s actual interest in the home did not arise until the state court judgment. As such, the transfer occurred by operation of law.



• Next, the court found that the language of the mortgage agreement included only real property. Accordingly, under Kentucky law, it did not encompass the debtor’s manufactured home.



• Thus, the court determined that the mortgage agreement did not create a lien on the home in favor of the bank. Having found that the bank’s lien was created by an involuntary transfer within ninety days of the petition date, the Sixth Circuit held that the debtor could avoid the bank’s lien on her manufactured home.

Source: Sixth Circuit avoids bank's lien interest in manufactured home (may require subscription; if no subscription, GO HERE; or TRY HERE - then click the appropriate link).

For the 6th Circuit Court of Appeals court ruling, see In re Dickson, 655 F.3d 585 (6th Cir. 2011).

(1) Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399 (6th Cir. BAP 2010).