Opinion
Case No. 6:23-bk-00905-TPG
2023-08-25
IN RE: Sinem H. ARIMAN, Debtor.
Wayne B. Spivak, Attorneys Justin Clark & Associates PLLC, Maitland, FL, for Debtor.
Wayne B. Spivak, Attorneys Justin Clark & Associates PLLC, Maitland, FL, for Debtor. AMENDED ORDER GRANTING MOTION TO REDEEM WINDOWS AS TANGIBLE PERSONAL PROPERTY PURSUANT TO 11 U.S.C. § 722 Tiffany P. Geyer, United States Bankruptcy Judge
Amended to correct a typographical error in footnote 12.
THIS CASE came on for hearing on May 3, 2023, upon the Debtor's "Motion to Redeem Personal Property Per 11 U.S.C. § 722" (the "Motion") (Doc. No. 10) and upon the objection (the "Objection") (Doc. No. 14) filed by Quantum3 Group, LLC ("Quantum3"), as Agent of Aqua Finance, Inc. ("Aqua"). The Debtor seeks to redeem windows installed in her home, valuing the windows at $500 and arguing that the windows constitute tangible personal property subject to redemption pursuant to § 722 of the Bankruptcy Code. (Doc. No. 10 ¶ 1.) Conversely, Quantum3 argues that the windows cannot be redeemed because they are attached to the Debtor's home, rendering them fixtures subject to treatment as real property under Florida law and thus not subject to redemption under § 722. (Doc. No. 14 ¶ 7.) After considering the Motion, the Objection, the arguments of counsel and the law, the Court grants the Motion and overrules the Objection for the reasons set forth herein.
Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
I. FACTS AND BACKGROUND
On October 6, 2021, the Debtor entered into a Retail Installment Contract & Security Agreement (the "Contract") with Florida Home Improvement ("FHI") for windows to be installed in her home for a financed amount of $23,928.65. (Doc. No. 14-1 at 1.) The Contract described the windows as goods. (Id. ("We agree to sell and you agree to buy the goods described below . . . . You are giving a security interest in any goods being purchased." (emphasis added))). The Contract did not describe the windows as fixtures. In fact, the Debtor agreed she would "not allow [the collateral] to become a fixture . . . ." (Id. at 2 (emphasis added)). The Contract also provided that if the Debtor defaults, the Debtor must pay any costs of repossession, collection, or realization of any security interest. (Id.) FHI assigned the Contract to Aqua. (Id.) On January 7, 2022, Aqua completed a fixture filing by filing a UCC Financing Statement in Seminole County, Florida. (Id. at 3-4.)
The Contract describes the goods as "WINDOWS/DOORS," but the Motion limits the redemption request to windows only, and the parties discussed only windows at the hearing on May 3, 2023.
The Debtor filed this Chapter 7 case on March 13, 2023. (Doc. No. 1.) On Schedule D, she included a $24,542 claim secured by the windows and valued the windows at $500, leaving the unsecured portion of the claim at $24,042. (Id. at 19.) She now seeks to redeem the windows as personal property under § 722 with a lump sum $500 payment, which she avers is fair market value. (Doc. No. 10 ¶¶ 1, 4.)
On Schedule A/B, the Debtor noted personal and household items that included solar panels on the roof of her home, a pool filter system, and the windows installed in her home. (Doc. No. 1 at 12 ¶ 14.) She valued the solar panels at $500, the pool filter system at $100, and the windows at $500. (Id.) The Debtor filed motions to redeem the pool filter system (Doc. No. 8) and the solar panels (Doc. No. 9), and the Court previously entered orders (Doc. Nos. 15, 16) granting the Debtor's motions based on the lack of any objection.
Quantum3, as Aqua's agent, objects to redemption arguing that the windows—which are undisputedly affixed to the Debtor's home and now a part of the home's physical structure—should be treated as real property instead of as tangible personal property subject to redemption under § 722. (Doc. No. 14 ¶ 7.) After all, windows are designed to be physically attached to real property, so these items are destined to become fixtures. Quantum3 also asserts that it is impossible to remove the windows from the Debtor's home without damage to the home and destroying the windows' value. (Id. ¶ 3.) As such, Quantum3 argues that the windows are fixtures that should be regarded as part of the real estate. (Id.) Quantum3 did not object to the Debtor's proposed $500 valuation or raise any other bases for objection. (Doc. No. 14.)
The Debtor alleges that her interest in the windows is either exempt or abandoned by the estate. (Doc. No. 10 ¶ 2.) Quantum3 did not challenge this allegation (Doc. No. 14.)
II. LAW AND ANALYSIS
Under § 722, a debtor may
redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.
11 U.S.C. § 722 (emphasis added). The legislative intent behind § 722 was for "redemption to provide a 'right of first refusal' for the debtor to purchase consumer goods that might otherwise be repossessed." In re Walker, 173 B.R. 512, 516 (Bankr. M.D.N.C. 1994) (citing 4 Collier on Bankruptcy ¶ 722.01 (15th ed. 1980)). Redemption permits a debtor to redeem goods "by paying the creditor the amount of the secured claim or the fair market value of the collateral, whichever is less . . . ." Matter of Edwards, 901 F.2d 1383, 1385 (7th Cir. 1990) (using fair market value). Redemption permits a debtor to retain a consumer item of value "beyond that which it could bring upon resale and less than replacement cost." Montgomery Ward & Co. v. Hall (In re Hall), 11 B.R. 3, 4 (Bankr. W.D. Mo. 1980) (citing 4 Collier on Bankruptcy, ¶ 722.01 (15th ed. 1980)). By the plain language of § 722, only tangible personal property can be redeemed.
As noted in Walker, the Bankruptcy Code does not define "tangible personal property." 173 B.R. at 514.
Importantly, "[t]hat an item may take on the character of a fixture in terms of the law affecting real property does not control the characterization of that item for purposes of bankruptcy law. A fixture is so denominated to determine whether it passes with sale of the real property. Redemption in bankruptcy has no concern about the passing of title." Id. (citing 4 Collier on Bankruptcy, ¶ 722.01). Nor will a security interest in a fixture yield a security interest in the realty on which the fixture is installed. Lankhorst v. Indep. Sav. Plan Co., 787 F.3d 1100, 1103 (11th Cir. 2015). Rather, a security interest in goods which may become fixtures perfected with a fixture filing financing statement "takes priority as to the goods over [any subsequent] conflicting interest of an encumbrancer or owner of the related real property . . . ." Fla. Stat. § 679.334(4) (2022) (emphasis added). A party holding a priority security interest in a fixture may, after default, " 'remove the collateral from the real property.' " Lankhorst, 787 F.3d at 1103 (quoting Fla. Stat. § 679.604(3)).
Here, the Court must determine whether the windows are tangible personal property or fixtures. "The term 'fixtures' is generally used in reference to some originally personal chattel (i.e., a movable good) which has been actually or constructively affixed either to the soil itself or to some structure legally a part of such soil." Lankhorst v. Indep. Sav. Plan Co., 39 F. Supp. 3d 1359, 1364-65 (M.D. Fla. 2014), aff'd, 787 F.3d 1100 (11th Cir. 2015). But "designating something as a fixture is not, by itself, dispositive: 'Courts should not infer from a fixture filing that a secured party concedes that the goods are or will become fixtures.' " Id. (quoting Fla. Stat. § 679.334(4) Official Comment 3).
In this case, the Contract described the windows as "goods" and supplied Quantum3 with a purchase money security interest ("PMSI"). (Doc. No. 14-1 at 1-2). Notably, the Contract also provided that the Debtor must not allow the windows to become fixtures to other property. (Id. at 2.) However, at least one bankruptcy court has observed there is a lack of consensus by courts as to what may and may not be agreed by contract to be personal property. In re Williams, 381 B.R. 742, 746 (Bankr. W.D. Ark. 2008) (citing examples). Rather, the issue turns on the identity of the parties to the dispute.
As observed in Dependable Air Conditioning & Appliances, Inc. v. Office of Treasurer & Insurance Commissioner, 400 So. 2d 117, 119 (Fla. 4th DCA 1981):
The law of fixtures is somewhat amorphous. The attachment of a chattel to realty in one instance may result in its becoming a part thereof, yet in another situation it may retain its character as tangible personal property. . . . "Fixtures are a species of property which lies along the dividing line between real and personal property. To decide on which side of the line certain items of property belong is often a difficult question."(Quoting 14 Fla. Jur. Fixtures § 2).
Florida law supplies three considerations for determining whether chattel is a fixture or other personalty: 1) the degree of the chattel's annexation to the realty; 2) the adaptation of the chattel to the use of the realty; and 3) the intention of the party who annexed the chattel to the realty. Cmty. Bank of Homestead v. Barnett Bank of the Keys, 518 So. 2d 928, 930 (Fla. 3d DCA 1987) (citing Com. Fin. Co. v. Brooksville Hotel Co., 98 Fla. 410,123 So. 814, 814 (1929)). The third element - the intention of the owner of the land upon which the chattel is annexed or placed— is considered the most important and generally determinative of whether chattel is personal property or a fixture. Seedhouse v. Broward, 34 Fla. 509, 16 So. 425, 429-30 (1894). The question is one of fact, or a mixed question of law and fact, and is decided on a case-by-case basis. In re Harbour E. Dev., Ltd., No. 10-20733-BKC-AJC, 2012 WL 314188, at *6 (Bankr. S.D. Fla. Feb. 1, 2012) (citing Cmty. Bank of Homestead, 518 So. 2d at 930).
Quantum3 cites In re Rolle, 218 B.R. 636, 640 (Bankr. S.D. Fla. 1998), for its recitation of the three-part test under Florida law to determine whether an item is a fixture (Doc. No. 14 ¶ 5), but the case is otherwise of limited assistance to the issue before the Court as it did not involve a request to redeem property under Section 722.
Quantum3 cites In re Harbour East (Doc. No. 14 ¶ 4), for the case's citation to Youngbey v. D.C., 766 F. Supp. 2d 197, 219-20 (D.D.C. 2011), which stated that "[d]oors and windows are generally considered to be real property or fixtures to real property, and are thus not personal property." However, Youngbey is not a bankruptcy case and is thus of little relevance. In In re Harbour East, the court denied summary judgment for the debtor based on the existence of genuine issues of material fact regarding whether certain goods were annexed to property, appropriately part of the property, and whether they could be removed without causing significant damage. In re Harbour E. Dev., Ltd., No. 10-20733-BKC-AJC, 2012 WL 314188, at *6-7 (Bankr. S.D.Fla. Feb. 1, 2012). The case did not address redemption.
Here, there is no dispute that the windows were affixed to the Debtor's home and are incorporated into the structure as would be the normal use of such property. Removing the windows would leave gaping holes in the Debtor's home and expose the interior to damage from weather and outside elements. Therefore, the first two elements tend to show the windows are fixtures. But the third element—the Debtor's intentions in attaching the windows to the Debtor's home—carries the most weight and is outcome determinative here where the parties to the dispute are the parties to the Contract or their assigns. As discussed in Alphonse M. Squillante, The Law of Fixtures: Common Law and the Uniform Commercial Code - Part I: Common Law of Fixtures, 15 Hofstra L. Rev. 191, 202 (Winter 1987):
Quantum3 also argues that removing the windows may damage the Debtor's home and that the costs of removal would destroy the windows' value. (Doc. No. 14 ¶ 3.) Although damage to the underlying real property is a factor courts consider, damage to the collateral does not appear to be a key factor. Lankhorst, 39 F. Supp. 3d at 1364-65 ("In determining whether an item is a fixture, a key factor is whether it 'can be removed without material or substantial injury to the free-hold.' " (Quoting Dependable Air Conditioning & Appliances, 400 So. 2d at 119)). And Quantum3 supplied no affidavit or other evidence on this point.
Expressions of intention between two parties nearly always bind them, as in an agreement to treat an article as a chattel for financing purposes, even though its annexation would normally make it a fixture; however, such an agreement binds neither a bona fide purchaser of the realty, who has no notice of an item's chattel status, nor a remainderman, who has no notice of the
life tenant's agreement regarding the item. Agreements on the status of chattels, absent statute, usually are binding on a prior mortgagee of the property, but seldom are binding on a mortgagee who obtains a mortgage subsequent to the affixation of the chattel.(Footnotes omitted.)
Here, the parties expressed their intention to treat the windows as goods, and not fixtures, in clear contractual terms. (Doc. No. 14-1 at 1-2.) Though Florida law emphasizes the Debtor's intention as the landowner, Seedhouse, 16 So. at 429-30, the case is even stronger for treating the windows as goods, and thus as tangible personal property subject to being redeemed, where both original parties shared and expressed this same intention. But see In re Reese, 194 B.R. 782, 792-93 (Bankr. D. Md. 1996) (disregarding contract as boilerplate unlikely to have been read or understood by debtors and concluding that parties intended chattel at issue, windows and a roof, to be permanently incorporated into the underlying realty thereby losing their character as personalty and sustaining debtors' objections to creditor's claims as secured and allowing them as unsecured). Furthermore, FHI supplied the Contract, which is not ambiguous as to the characterization of the windows and the form of security. As such, the windows are tangible personal property which the Debtor may choose to redeem, notwithstanding Aqua's subsequent fixture filing.
Case law supports this conclusion. In In re Walker, the debtor sought to redeem vinyl siding and trim, which is similar in nature to windows insofar as each is designed to be affixed to real property. In re Walker, 173 B.R. at 513. The contract included a provision granting the seller a PMSI in the siding and trim. Id. at 514. The secured creditor objected to redemption and argued these items were fixtures and not tangible personal property able to be redeemed by the debtor. Id. Like Aqua did here, the secured party in Walker completed a fixture filing, which the court found established its priority in the siding and trim as related to third parties. Id. at 515. However, with respect to the relationship between the debtor and the creditor, the creditor's secured position was established not through the fixture filing but rather through the PMSI it obtained at the time of sale. Id. As such, "the same item that may be considered personal property in one situation may be considered real property where a different relationship exists." Id. (internal citations omitted).
The bankruptcy court then turned to North Carolina law to determine whether the chattel would be considered real or personal property. Id. In Florida, the test focuses more on the owner of the property to which the chattel is affixed, while in North Carolina, the test hinges upon the intention of both parties regarding the annexation. Id. If, under a contract between a buyer and seller of property, the buyer gives the seller a security interest in chattel and then affixes it to real property, the chattel remains personal property as between the parties. Id. In Walker, the court found that the siding was intended to be personal property and remained so as between the parties because: (1) the nature of the transaction was the sale of goods; (2) the secured party's interest in the goods derived from a PMSI; and (3) the secured party had no rights in the real property. Id.
The court emphasized its holding, noting that the secured party claimed a PMSI in goods in the sales contract and in its proof of claim. Id. at 516. "Filing a fixture filing in addition to the [PMSI] is not determinative regarding the nature of the collateral; it is routinely done by creditors and often is merely precautionary." Id. Rather, the secured party's "sole security is a lien upon the siding and its sole remedy is to repossess the siding after severing it from the real property to which it is attached." Id. Thus, the siding was considered personal property and subject to redemption under § 722. Id.
Because the Chapter 7 trustee concluded this is a no asset case, a proof of claim deadline was not established. Thus, Quantum3 did not file a proof of claim.
Other bankruptcy courts have reviewed whether windows are considered goods or fixtures and whether the related claims were secured or unsecured and have likewise determined the issue turns on the relationship between the parties to the dispute, i.e., whether the dispute was between the debtor and a secured creditor (the original contracting parties or their assigns) or whether the dispute involved a third party. In In re Hinson, 77 B.R. 34 (Bankr. M.D.N.C. 1987), a creditor objected to the Chapter 13 trustee's characterization of its claim for financing the debtor's windows and gutters as unsecured. The creditor had a PMSI in the windows and gutters that perfected without the necessity of filing a financing statement if the windows and gutters were considered consumer goods. In re Hinson, 77 B.R. at 37. But if these items became fixtures, the creditor would hold only an unsecured claim because it failed to perfect its security interest against a subsequent lien creditor by completing a fixture filing financing statement. Id. On one hand, the contract between the debtor and the creditor clearly provided that the windows and gutters would remain personal property. Id. at 36. On the other hand, it seemed "obvious [to the court] that the parties intended for the windows and gutters to become a permanent part of the real estate. The only logical use for windows and gutters to the consuming public is as an addition to a building." Id.
The court recognized that although the contract provided that the goods would remain personal property and that such an agreement may be valid between the contracting parties, "it is not binding when third parties become involved." Id. Instead, when third parties (such as a Chapter 13 trustee) are involved, "the intention is considered in terms of what would be 'reasonably apparent to such third person as manifested by physical facts and out-ward appearances.' " Id. (quoting Little v. Nat'l Servs. Indus., Inc., 79 N.C.App. 688, 340 S.E.2d 510, 513 (1986)). Accordingly, the court concluded that windows and gutters were fixtures as of the petition date, leaving the creditor's claim unsecured. Id.
By contrast, in In re Dalebout, 454 B.R. 158 (Bankr. D. Kan. 2011), the dispute was between the debtors and a creditor which asserted a secured claim related to windows. The debtors objected to the creditor's proof of claim "on the basis that because the windows were installed in their home, they had become fixtures" and that because the creditor had neither a mortgage on their property or a fixture filing, the claim was unsecured. In re Dalebout, 454 B.R. at 160. The relevant documents gave the creditor a PMSI in the windows. Id. at 159-60. They also specified that the creditor would "not claim a security interest or other lien (except a judgment lien) in [the debtor's] principal dwelling" and further provided that the debtor agreed that the windows would "not become a fixture even if attached to real property." Id. at 160.
The court turned to Kansas's three prong test to determine whether the windows were a fixture:
(1) annexation to the realty (how firmly the items are attached and how easily they can be removed); (2) the intent of the parties (whether they intended the item to be permanently affixed to the real estate); and (3) how operation of the goods is related to the use of the realty (adaptability). All three requirements must be met before property will be deemed to be a fixture under Kansas law.Id. at 161. The court concluded that, except when a trustee is seeking to avoid a lien to benefit the bankruptcy estate or when removing the property would substantially damage the real estate, "a party should not be able to get the benefit of the bargain by agreeing to treat property in one manner and then changing that position at a later date when it inures to his [or her benefit]." Id. at 164 (emphasis added). Because the parties agreed that the windows would not be considered fixtures and because there was no evidence that their removal would substantially damage the property, the court held that the windows remained personal property and were not fixtures. Id. The debtors agreed to give the creditor a PMSI and would be held to that agreement, resulting in a secured claim for the creditor. Id. at 159-60.
The commonality among the cases is that, if the dispute is between the original parties to a financing contract or their assigns, then the chattel is what the parties agreed it to be in the contract. Here, the dispute about whether the windows are tangible personal property or fixtures is between the Debtor and Quantum3—a party to the Contract and the assignee of the other party to the Contract. As such, the Court finds that the windows are tangible personal property as between the Debtor and Quantum3 and subject to redemption under § 722. Further, because Quantum3 did not object to the Debtor's proposed fair market valuation of the collateral at $500, Quantum3 waived any argument for a different or higher valuation. 625 Fusion, LLC v. City of Fort Lauderdale, 526 F. Supp. 3d 1253, 1261 n.3 (S.D. Fla. 2021) (equal protection claim suffered from deficiency, but defendant waived point by failing to raise it).
In In re Perez, 318 B.R. 742, 743 n.1 (Bankr. M.D. Fla. 2005), the Hon. Michael G. Williamson adopted a "wholesale value" standard for personal property redemptions and found such to be synonymous with the terms "liquidation value" and "foreclosure-value," which represent "the low end of the valuation spectrum with 'replacement value' or 'fair market value' to represent the high end . . . .").
III. CONCLUSION
Accordingly, it is
ORDERED as follows:
1. The Motion (Doc. No. 10) is GRANTED, and the Objection (Doc. No. 14) is OVERRULED;
2. The Debtor must pay Creditor $500.00 in one lump sum to redeem the windows on or before September 4, 2023;
3. If the Creditor fails to cancel its lien within three days after receiving payment, then this Order will serve as authorization for the lien to be canceled, and the applicable County Clerk's office must cancel same of record; and
4. If the Debtor fails to timely pay the redemption amount, the automatic stay will immediately terminate as to the windows.
ORDERED.