Gerner & Kearns Co., L.P.A.

Kentucky Court Of Appeals Rejects Lender's Attempt To Attach Manufactured Home

On August 23, the Kentucky Court of Appeals struck another blow against lenders seeking to enforce a lien against a manufactured home. In Clancy v. Green Tree Servicing, LLC, the Court of Appeals held that a lender could not assert an "equitable lien" in a manufactured home.

Manufactured homes have been a headache to lenders since the Court of Appeals decided Hiers v. Bank One more than two decades ago. In Hiers, the Court of Appeals ruled that, contrary to long-standing practice, a manufactured home remained personal property even when affixed to real estate, and the only way to perfect a lien on a home was to have the lien notated on the manufactured home's certificate of title.

The legislature soon responded, setting out a procedure by statute allowing an owner to surrender a certificate of title to the county clerk, and thus "convert" the manufactured home to real estate. However, this fix did not resolve the issue for the many manufactured homes that had already been permanently affixed to the real estate and were being treated as real estate by the owners. Lenders have found it difficult and sometimes impossible to obtain orders for sale on defaulted loans for manufactured homes from trial courts, which rely on Hiers to deny lenders' attempts to foreclose.

The decision in Clancy makes obtaining such an order even more difficult. In Clancy, the prior owners had failed to transfer the certificate of title to the Clancys when they bought the property. Thus, the manufactured home remained unconverted and personal property, with a certificate of title in a different name than that of the owners/mortgagors. When the Clancys defaulted on their mortgage loan, Green Tree Servicing initiated foreclosure proceedings, naming both the Clancys, as the mortgagors, and the prior owners, for their interest in the manufactured home. The prior owners disclaimed any interest in the manufactured home and surrendered the certificate of title to the court.

Green Tree moved for summary judgment, acknowledging that it had not notated a lien on the certificate of title, nor had the manufactured home been converted to real estate in conformity with statute, but that it was entitled to an "equitable lien" on the home. The Court of Appeals rejected this argument, holding that equitable relief cannot be had in circumstances where there is means to obtain legal relief. The court reasoned that a party cannot make an equitable claim to avoid the results of its own negligence in failing to perfect a lien on the manufactured home.

This ruling is clearly detrimental to lenders, but may not be as large of a blow that it appears at first glance. To begin, the opinion makes no mention of the lender asserting an unperfected security interest in the manufactured home. People often forget that the decision in Hiers dealt with a priority dispute between two lenders. There was no decision in Hiers on the validity of the lien as between the parties to the transaction..

Under the Uniform Commercial Code as adopted by the state of Kentucky, a security agreement is effective as between the parties. An argument not made in Clancy, but that appears would be effective, is that the Mortgage Agreement is a security agreement and can be enforced between the parties, even if unperfected. Most mortgages are signed by the borrower, are given for value, and explicitly set out that the mortgaged property includes any improvements on the real estate. A lender's case is even stronger if the mortgage makes specific mention of the manufactured home, either by a rider or a description of the home in the legal description. When the dispute is not between a lender and lienholder with a perfected security interest, but instead between the lender and the borrower, the "security agreement" of the mortgage should be controlling as between the parties, and the lender's recognized by the court.

Further, a judgment holder has the right to sell any property, real or personal, of the judgment debtor. A holder of a mortgage is not limited to the real property described in the mortgage, but can request any other property of the judgment debtor to be sold to satisfy its judgment. There is obviously a caveat in cases where the home is sold or the debtor files bankruptcy, but this would be a minority of cases.

The Court of Appeals continues to restrict lenders' ability to collect on liens secured by manufactured homes, but lenders can take action to protect their interests. First, a lender should require that a manufactured home be converted to real estate in the county offices as a prerequiste to closing. Further, for additional security, the lender should make sure that the manufactured home is explicitly identified in the mortgage as being part of the transaction. By following these recommendations, lenders can reduce any risk of loss.

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