By: Christopher A. Dawson, Litigation Counsel
Many real estate mortgage loans in West Virginia are secured by a manufactured home which can be considered either personal property or real property, depending on the circumstances. This dual character of manufactured homes can result in lien perfection disputes, particularly if the borrowers have filed for relief under the United States Bankruptcy Code. This very scenario occurred in a case that was ultimately resolved in the recent West Supreme Court of Appeals opinion in Sheehan v. Mortgage Electronic Registration Systems, Inc., 2020 WL 7222454, _ S.E.2d __ (2020), rendered on November 17, 2020.
A manufactured home is considered personal property and is required to have a certificate of title until it has been affixed to the land. WV Code §17A-3-12. In order to perfect a lien on personal property that has a certificate of title, the lien must be noted on the title. WV Code §17A-4A-3(b). A manufactured home’s certificate of title may be cancelled by the Division of Motor Vehicles following the procedure set forth in WV Code §17A-3-12b, after which the manufactured home is treated as an appurtenance to the real estate and is transferred with the land by deed, as is any “stick-built” home. Once the certificate of title has been canceled, a recorded deed of trust encumbers both the real estate and the manufactured home located thereon.
In Sheehan, the borrowers had granted a Deed of Trust to secure their loan by encumbering their real estate which was fully described therein, including a specific reference to the borrowers’ manufactured home. The bankruptcy trustee discovered that there was still an active certificate of title for the manufactured home and that the lender’s lien was not noted on the title. Thus, the trustee filed an adversary proceeding against the lender seeking an order from the bankruptcy court that the lender’s lien was not perfected and the unencumbered manufactured home was an asset of the bankruptcy estate.
In response, the lender did not dispute the existence of the certificate of title or that its lien was not noted on the title. Rather, the lender argued that the manufactured home was physically affixed to the real estate and had become a fixture based on the elements set forth in an over one hundred year old decision, Snuffer v. Spangler, 92 S.E.2d 106 (W.Va. 1917). The bankruptcy court determined that the parties’ arguments had not previously been considered by West Virginia’s highest court and certified the question of law to the Supreme Court of Appeals.
After considering the briefs and oral arguments of the parties, the Court answered the certified question in favor of the lender in a 3-2 decision, holding that a lien on a manufactured home could be perfected by the recording of a deed of trust when the manufactured home has become a fixture by satisfying the requirements of Snuffer v. Spangler, without prior cancellation of the certificate of title. The dissenting justices asserted that the statutory framework for certificates of title provided the sole means to perfect a lien in a manufactured home and affix it to real estate.
The significance of the Sheehan decision for lenders is that it provides a defense to actions challenging the perfection of the lender’s lien. These actions are typically brought by bankruptcy trustees in regard to manufactured home liens which are frequently mishandled in real estate closing transactions. Lenders often rely on affidavits signed by borrowers stating that the home is affixed to the real estate and record the affidavit with the deed of trust to perfect their lien without checking for the existence of a certificate of title or bothering to have the lien notated on the title. Prior to Sheehan, it was generally understood this procedure was not sufficient if challenged by a bankruptcy trustee because of the lack of a lien noted on the still active title. Lenders can now assert that the home is physically affixed and, therefore, encumbered by the deed of trust in reliance on the Sheehan holding.
Notwithstanding the favorable holding in Sheehan, closing agents and attorneys should still follow the requirements of the certificate of title statutes when perfecting a lien in a manufactured home; specifically, by confirming whether or not the title has been cancelled and, if not cancelled, either take the necessary steps to cancel it or ensure that the lien is noted on the title. Following these procedures will avoid having to litigate lien perfection which would involve a fact-based inquiry as to whether the home is actually affixed to the land. However, Sheehan does provide lenders with an alternative argument for perfection when the procedures are not followed as is likely to happen on occasion.
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