Summary of a Recent
Judicial Development in
Bankruptcy

Farm Buildings Are Personal Property
Under Ohio Law

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Jarvis, 310 B.R. 330 (Bankr. N.D. Ohio 2004), the United States Bankruptcy Court for the Northern District of Ohio held that farrowing and gestation buildings did not become fixtures on debtors' land, and thus were not subject to a commercial lender's mortgage liens.

Background

Debtors were hog farmers who formed Jarvis Swine, LLC (Jarvis Swine). See id. On September 20, 2000 the debtors executed two open-end mortgages with The First National Bank of Pandora (Pandora Bank) using their real property as security. See id. Pandora Bank properly recorded these mortgages under Ohio law. See id. In order to expand their operation, debtors, through Jarvis Swine entered into a lease agreement with Telmark, LLC (Telmark). See id. The substance of the lease agreement provided that Telmark would finance construction of a farrowing building and a gestation building on debtors' property. See id. Under the terms of the lease, Jarvis Swine, LLC would make monthly payments of $1,191.00 and at the end of the lease would have one of three options concerning the structures. See id. They could renew the lease, purchase the buildings at fair market value, or allow repossession of the buildings by Telmark. See id. Telmark filed a financing statement showing the buildings as security for the lease. See id. On December 31, 2002 the debtors filed for bankruptcy under Chapter 12. See id. On June 30, 2003 the debtors sought a determination of the interest in their property of Wells Fargo, the assignee of Telmark, and Pandora Bank so they could present a plan of reorganization. See id.

Arguments

Pandora Bank argued that it had a superior security interest in the buildings due to their mortgage interest in debtors' real property. See id. Pandora Bank argued that because the buildings were fixtures, they became subject to their mortgage interests. See id. Wells Fargo argued that the buildings were not fixtures under Ohio law. See id.

Analysis and Holdings

The court explained that the Ohio Supreme Court in Teaff v. Hewitt, 1 Ohio St. 511 (1853), established a three-prong test for determining whether a structure was a fixture. See id. The test was: "(1) Actual annexation fo the realty, or something appurtenant thereto; (2) Appropriation to the use or purpose of that part of the realty with which it is connected; [and] (3) The intention of the party making the annexation, to make the article a permanent accession to the freehold." Id. at 335. The court noted that Wells Fargo conceded the first of the three prongs and explained that between the second and third prongs, the intention of the party was of paramount importance. See id.

Concerning the parties intent, the court explained that the lease agreement between Jarvis Swine, LLC and Telmark clearly intended the structures to be personal property. See id. The court explained that the lease expressly provided that the structures were personal property and, given the ability of Telmark to repossess the buildings and disconnect the buildings from utilities if certain conditions of the lease were not met, the parties intended the buildings to remain personalty. See id. The court further explained that Pandora Bank's failure to obtain any type of subordination agreement from Telmark and the type of construction materials used for the farrowing and gestations buildings suggest an intent for the buildings to remain personalty. See id. The court explained next that, concerning the second prong of the Teaff test, if personal property is specific to the type of business conducted on the real property the personal property is referred to as "trade fixtures" and does not become part of the real property. See id. The court held that the buildings were intended to be personal property, and that they were not of a kind generally found on the realty, but were trade fixtures of the debtors' business. See id. Thus, the court concluded that Pandora Bank's interest was not superior to that of Wells Fargo. See id.

The case was decided on January 15, 2004; this summary was posted Dec. 15, 2004.