SOUTHERN INDUSTRIAL, LLC VS. NOT TO PUBLISHED MAXINE, LLC , ET AL.

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RENDERED: NOVEMBER 25, 2009; 10:00 A.M. NOT TO BE PUBLISHED Commonwealth of Kentucky Court of Appeals NO. 2008-CA-002311-MR SOUTHERN INDUSTRIAL, LLC v. APPELLANT APPEAL FROM FAYETTE CIRCUIT COURT HONORABLE JAMES D. ISHMAEL, JR., JUDGE ACTION NO. 05-CI-04751 MAXINE, LLC; CENTRAL BANK AND TRUST COMPANY; KENNETH R. LEVINE; JAMES R. KREISSMAN; JACOB SAFTER; JOSHUA WINKLER; ZWD INVESTMENTS, LLC; LEVITIN FAMILY CHARITABLE TRUST; MARSHALL M. BECKER; STANLEY S. BECKER; GERALD MALINOW; WABA VENTURES, LTD.; GEOFFREY M. HAAR; J.E. MCCONNAUGHEY; SKYFARM MANAGEMENT, LLC; DAVID BARRETT, INC.; BRIVIS INVESTMENTS, LTD., C/O EZZAT JALLAD; THE LINCOLN FUND TAX ADVANTAGE; ANTHONY CAPPIELLO; GERALD MALINOW ROTH IRA; LIEBRO PARTNERS; AND LIEBRO PARTNERS, COLLECTIVELY REFERRED TO AS “THE BRIDGE LENDER DEFENDANTS” OPINION AFFIRMING ** ** ** ** ** APPELLEES -2- BEFORE: COMBS, CHIEF JUDGE; MOORE, JUDGE; LAMBERT,1 SENIOR JUDGE. MOORE, JUDGE: Southern Industrial, LLC, appeals from a judgment of the Fayette County Circuit Court rendering its mechanic’s lien invalid and dismissing its claim for enforcement of said lien against the real property of Appellee, Maxine, LLC. Because Southern’s lien was based upon trade fixtures intended to benefit a tenant’s business, rather than fixtures intended to become part of the underlying real property, we affirm. Maxine, LLC, owns certain commercial property located in Lexington, Kentucky. Maxine leased the property to Applied Chemical Technologies, Inc. (ACT). The lease stated that “all moveable trade fixtures installed by [ACT] shall be and remain the property of [ACT].” ACT purchased, had transported, and arranged for the installation of four silos next to the commercial warehouse located on the property. ACT intended to use these silos in connection with its fabrication business, specifically for the purpose of the storage and gravity flow of resin pellets. Each silo is forty-feet tall, weighs several tons, and each is bolted onto eight-foot-deep concrete pads which ACT constructed on the property to accommodate them. However, the bolts could be easily cut and each of the silos could be removed and transported to a different location in one day’s time without significant damage to themselves or the real property. 1 Senior Judge Joseph Lambert sitting as Special Judge by assignment of the Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statute (KRS) 21.580. -3- Southern Industrial, LLC, by agreement with ACT, performed work and provided labor and materials for the improvement of the silos. ACT failed to pay Southern for its work and declared bankruptcy. Subsequently, pursuant to Kentucky Revised Statute (KRS) 376.010, Southern asserted a mechanic’s lien against Maxine’s real property and sought to enforce it. The material issue in this matter became the validity of Southern’s mechanic’s lien against Maxine’s real property, i.e., whether KRS 376.010 applies to Maxine’s real property by virtue of Southern’s work and repairs on the silos placed upon Maxine’s property by ACT. Over the course of two hearings, one of which was conducted at the site on Maxine’s property, a Master Commissioner viewed the silos and took testimony. In his findings of fact and conclusions of law, the Master Commissioner determined that the silos were ACT’s personal property because they were “trade fixtures,” rather than “ordinary fixtures.” Nevertheless, the Master Commissioner concluded that Southern’s mechanic’s lien was valid against Maxine’s real property because the silos were “structures” as contemplated by KRS 376.010. Maxine timely objected to the Master Commissioner’s findings, arguing in particular that ACT’s silos were not “structures” under KRS 376.010. The Fayette Circuit Court sustained Maxine’s objection, dismissed Southern’s claim against Maxine, and ordered Southern to release its lien. This appeal followed. -4- As stated above, the law of mechanic’s liens relevant to this case is governed by KRS 376.010(1), which provides that: [a]ny person who performs labor or furnishes materials, for the erection, altering, or repairing of a house or other structure or for any fixture or machinery therein, for the excavation of cellars, cisterns, vaults, wells or for the improvement in any manner of real property including the furnishing of agricultural lime, fertilizer, concrete pipe or drainage tile, crushed rock, gravel for roads or driveways, and materials used in the construction or maintenance of fences, by contract with, or by the written consent of, the owner, contractor, subcontractor, architect, or authorized agent, shall have a lien thereon, and upon the land upon which the improvements were made or on any interest the owner has therein, to secure the amount thereof with interest as provided in KRS 360.040 and costs. . . . The court below found as a matter of law that the silos in question were “trade fixtures,” but not fixtures. Southern does not distinguish in its brief whether the silos are trade fixtures or ordinary fixtures. Rather, it argues that the silos should be subject to a mechanic’s lien under KRS 376.010, as a broad and liberal reading of the word “fixtures” under that statute encompasses either and either would be part of the real property owned by Maxine. In the alternative, Southern argues that if the silos are not considered “fixtures,” they should, nevertheless, be classified as “structures,” which are also covered by KRS 376.010. We disagree because (1) a “fixture” is considered part of a landowner’s real property; (2) a “trade fixture” is considered a non-landowner’s (i.e., lessee’s or tenant’s) personal property; (3) the silos in the case at bar are trade fixtures, rather than ordinary fixtures; and (4) the terms “trade fixture” and “structure,” for -5- purposes of KRS 376.010, are mutually exclusive because trade fixtures do not become part of the realty. “A fixture is an article in the nature of personalty, which has been so annexed or affixed to realty that it is regarded for legal purposes as part of the realty, loses its separate existence, partakes of the legal incidents of the freehold, and belongs to the person owning the land.” 36A C.J.S. Fixtures § 1 (internal citations omitted). Common law in Kentucky held that whatever was affixed to the soil (e.g., a fixture) became in contemplation of law a part of it and was consequently subjected to the same rights of property as the soil itself. Pennington v. Black, 261 Ky. 728, 88 S.W.2d 969, 973 (1935). Moreover, the common law of fixtures encompasses several relationships, such as landlord and tenant, lessor and lessee, life tenant and remaindermen, etc. Id. The common law test for identifying fixtures considers “[f]irst, annexation to the realty, either actual or constructive; second, adaptation or application to the use or purpose to which that part of the realty to which it is connected is appropriated; and third, intention to make the article a permanent accession to the freehold.” Doll v. Guthrie, 233 Ky. 77, 24 S.W.2d 947, 948 (1929). Regarding the first element to the test, an item is annexed to the land if it cannot be removed without serious injury to itself and the land. The common law required only actual annexation to the soil, but it has been modified to include items that have been “constructively annexed” to the land. Id. Such annexation -6- occurs “when a particular article, although not permanently attached to realty, is so adapted to the use to which the realty is put that it may be considered an integral part of the realty . . . [or] when removal leaves the personal property unfit for use so that it would not of itself and standing alone be well adapted for general use elsewhere.” 36A C.J.S. Fixtures § 14 (2009); see also Doll, 24 S.W.2d at 949. As a caveat, however, this element is generally given little weight. The decisions in the courts of Kentucky “[are] against the common law doctrine that the mode of annexation is the criterion, whether slight and temporary, or immovable and permanent, and in favor of declaring all things to be fixtures which are attached to the realty with a view of the purposes for which it is held or employed.” Doll, 24 S.W.2d at 948 (emphasis added); see also Pennington, 88 S.W.2d at 973 (“In determining what is a fixture, the notion of physical attachment is exploded; it is now determined by the character of the act by which the structure is put into its place, the policy of the law connected with its purpose and the intention of those concerned.”) As such, the element of annexation is merely a factor to be considered in determining the “controlling” third element: the intention of the owner in the item’s use. See Doll, 24 S.W.2d at 948 (“[T]he intention of the owner as to its use . . . is of controlling importance in determining the question.”) The second element of the test, “adaptation,” is met when the item in question has been adapted or applied to the use or purpose of that part of the property with which it is connected. Id. Further defining this element, and -7- consistent with Kentucky precedent, is the succinct reasoning contained in 35A Am. Jur. 2d Fixtures § 11 (2009): Under the adaptation element of the test, the item should be peculiarly adapted to the real property or premises; an item usable at other locations is not peculiarly adapted for use on the land in question. The adaptation requirement for an object to constitute a fixture is met when the particular object is clearly adapted to the use to which the realty is devoted. The courts will consider the extent to which an article is essential to the permanent use of a building or other improvement, and . . . the courts must determine whether a chattel is essential to the purpose for which a building is used or occupied in determining whether it becomes a fixture or remains personalty. It has been said that an article loses its status as simple unrelated personalty and becomes a fixture when it becomes so integrated into the efficient use of the particular parcel of real estate that it has become logically considered more a part of real estate than not. . . . (Internal citations omitted.) This second element is generally considered as entitled to much weight, especially in connection with the criterion of intention [discussed below]; the tendency being to regard everything as a fixture which has been attached to realty with a view to the purposes for which the realty is held or employed, however slight or temporary the connection between them. Doll, 24 S.W.2d at 948. The third element of the test, the intention of the party making the annexation, is determinative in cases where there is any doubt as to whether an item is, or is not, a fixture. To have this effect, -8- the intention to make an article a permanent accession to the realty must affirmatively and plainly appear, and if the matter is left in doubt and uncertainty the legal qualities of the article are not changed, and it must be deemed a chattel. But the test of intention is to be given a broad and comprehensive signification. It does not merely imply the secret action of the mind of the owner of the property, nor need it be expressed in words, but is to be inferred from the nature of the article affixed, the relation and situation of the party making the annexation, the structure and mode of annexation, and the purpose or use for which the annexation has been made; which, obviously, suggests that the other tests are really part of this comprehensive test of intention, and that they derive their chief value as conspicuous evidence of such intention. Id. (emphasis added). Thus, while three tests have been enumerated above, the tests of annexation and adaptation are merely part of the comprehensive test of intention, i.e., they are conspicuous evidence of the intent to integrate an item of personal property into real property as a fixture. One notable exception to this general rule of common law regards “trade fixtures.” This exception provides that an item of property that a lessee annexes to realty, belonging to a lessee, and used by the lessee for purposes of trade is generally regarded as remaining personal property, rather than becoming real property, based upon principles of public policy and a desire to encourage trade and manufacturing. Van Ness v. Pacard, 27 U.S. 137, 143-44, 7 L.Ed. 374, 376-77 (1829). This is because the intent of annexing a trade fixture to the land is to benefit the business of the party annexing the fixture to the land, not the land -9- itself. This exception applies in the context of several relationships and, of relevance to this case, applies in the context of lessor-lessee and landlord-tenant. The “trade fixtures” exception to the common law rule dates back almost as far as the common law rule itself. Id. Indeed, dating back to the 19th century, Kentucky courts have consistently classified trade fixtures as “personal property,” and recognized the right of a tenant to remove fixtures erected by the tenant at his own expense, “modified to meet the wants and necessities of trade and commerce and the arts and sciences.” See, e.g., Thomas v. Crout, 68 Ky. 37, 5 Bush 37, 40 (1868); see also Davis' Adm'r v. Eastham, 81 Ky. 116, 4 Ky. L. Rptr. 850, 852 (1883) (“[B]etween landlord and tenant, [the law of fixtures] gives the greatest latitude and indulgence to the claim of articles as personal property; the rule being still broadened with reference to articles used for manufacturing and trade[.]”) In sum, Kentucky law defines a “trade fixture” as the personal property of a lessee, specifically “an article annexed by the lessee to the real estate to aid him in carrying on his trade or business on the premises[,] which may be removed at the end of a tenant's term.” Bank of Shelbyville v. Hartford, 268 Ky. 135, 104 S.W.2d 217, 219 (1937). As such, the hallmark for the trade fixtures test, like the Doll fixtures analysis, is intent: “[t]he sole question is, whether it is designed for purposes of trade or not.” Van Ness, 27 U.S. at 146; see also Doll, 24 S.W.2d at 948 (“[T]he intention of the owner as to its use . . . is of controlling importance in determining the question.”) -10- Turning to the case at bar, it must be noted at the outset that application of this test is normally a question of fact, but it becomes a question of law when only one reasonable conclusion may be drawn from the evidence. Gregory v. Paducah Midstream Service, 401 S.W.2d 40, 41 (Ky. 1966); see also Wisconsin Dept. of Revenue v. A. O. Smith Harvestore Products, Inc., 240 N.W.2d 357, 360 (Wis. 1976) (reviewing de novo trial court’s determination of whether prefabricated metal silo retained its character as personal property). Furthermore, this matter involves the meaning and application of a statutory standard. In sum, as the matter before this Court involves only questions of law, we review the trial court’s findings de novo. New v. Commonwealth, 156 S.W.3d 769, 774 (Ky. App. 2005). The first part of the common law fixtures analysis, “annexation to the realty,” requires that the silos be affixed to the soil such that removal would result in serious injury to the property. ACT’s silos are more than forty-feet tall, weigh several tons, and are bolted to the property on a concrete base. However, as the trial court held, and as neither party contests, the evidence demonstrates that these silos can be unbolted and removed from the property on which they are situated without significant damage to themselves or the real property. In fact, the silos were transported onto the real property by ACT. As such, we find this element fails. The silos also fail to meet the second part of the fixtures test because they are not adapted to the use of the realty onto which they have been placed. -11- Here, Maxine contends, and Southern does not contest, that the silos at issue were not particularly adapted to Maxine’s property. Prior to ACT’s lease, only a warehouse was situated on the property in question. ACT brought the silos onto the real property and customized them specifically to store resin pellets, to be used in connection with ACT’s fabrication business. The sole principal of Maxine, Russell Louden, testified before the Master Commissioner that his company has no use for the silos and that the silos are not suited for purposes related to the warehouse. The facts of this case also demonstrate that the silos would be useable at another location. As such, the silos have not become so integrated into the efficient use of the warehouse or real property that they have become logically considered more a part of the real estate than not. Finally, as noted above, “annexation” and “adaptation” serve only to inform the analysis before addressing the controlling third part of the inquiry, i.e., whether ACT intended the silos to be a permanent annexation to the land intended to benefit that land. As stated in Van Ness, 27 U.S. at 146, 7 L.Ed. at 377, “[t]he sole question is, whether it is designed for purposes of trade or not.” Here, neither party contests that ACT’s purpose in bringing these silos onto Maxine’s property was for the storage and gravity flow of resin pellets which were to be used by ACT in its business on the property. In addition, neither party contests that the lease between ACT and Maxine provided that “all moveable trade fixtures installed by [ACT] shall be and remain the property of [ACT].” As such, in applying the legal standard enumerated above, and drawing the only reasonable conclusion from the -12- evidence, the silos in question are trade fixtures and personal property because ACT’s purpose in bringing the silos to the property was to further its business and not to make them a part of Maxine’s realty. Nevertheless, Southern contends that the silos are fixtures because they are bolted onto eight-foot-deep concrete pads on Maxine’s property and because other jurisdictions have held that silos are considered fixtures. Neither argument has merit because both ignore the dispositive element of intent. Regarding the silos’ attachment to the concrete pads on Maxine’s property, ACT intended to further its own business in bringing the silos onto Maxine’s property. As such, ACT paid for the silos, their transport to Maxine’s property, and, importantly, the construction of the concrete pads they were placed upon. In light of the above, the manner in which they were annexed to the ground is relevant only to the question of intent and, in light of ACT’s intent, this detail is negligible. The very fact of the silos’ presence on Maxine’s property, by itself, does not change the above analysis. Intent is the determining factor, and Maxine has unequivocally disclaimed any interest in the silos. Russell Louden, Maxine’s principal, affirmatively testified before the Master Commissioner that if ACT wanted to take the silos and leave, he would have no problem allowing them to do so. Specifically, he stated “No. No, I wouldn’t have any problem because I didn’t purchase [them], I didn’t bring [them] in. I had no business of doing anything with [them].” -13- Second, while Southern cites to several cases demonstrating that silos could be classified as either “fixtures” or “structures,” these cases are not applicable to the facts of this case because they were all resolved outside the context of a lessor-lessee or landlord-tenant relationship. See generally, In re Klien, 114 F.Supp. 291, 293 (W.D. Ky. 1953) (landowner’s addition of a silo and machinery on his property deemed a fixture and part of the realty); Funtime, Inc. v. Wilkins, 822 N.E.2d 781 (Ohio 2004) (defining a silo as a “fixture” and a “structure” for purposes of taxation); George v. Town of Calais, 373 A.2d 553 (Vt. 1977) (addition of silo on landowner’s farm realty deemed a “fixture” for tax purposes); Wisconsin Dept. of Revenue v. A. O. Smith Harvestore Products, Inc., 240 N.W.2d 357, 363 (Wis. 1976) (owner of farm realty intends to make a permanent accession to his farm realty when purchasing a silo, but where a tenant installs silo, there is a presumption that it is temporary and that tenant intends to remove it at the end of the lease period). It is the controlling element of the intent of the parties that is dispositive to the issue of whether the silos in this case were “fixtures” attaching to the real property, or whether they remained the personal property of ACT. Consistent with that controlling element, and as noted above in A.O. Smith (cited as persuasive authority by Southern), it is presumed that a tenant or lessee brings property onto a landlord’s or lessor’s land for his own enjoyment, temporarily, and not for the benefit of the landowner. As a consequence, “[a]s between landlord and tenant[,] the greatest latitude and indulgence is given to the claim that fixtures -14- attached to the realty by the tenant remain [the tenant’s] personal property.” Warren Post No. 23, Am. Legion v. Jones, 302 Ky. 861, 196 S.W.2d 726, 729 (1946) (citations omitted; emphasis added). It is certainly true that the silos that are the subject of this case could have been “fixtures” attaching to Maxine’s real property, if that was the intent of both Maxine and ACT. However, in light of the circumstances of this case and the overwhelming presumption that fixtures attached to the realty by the tenant remain the tenant’s personal property, this Court finds that these silos are personal property, i.e., trade fixtures, belonging to ACT and/or its assignees,2 rather than Maxine. In light of the public policy and established precedence of classifying “trade fixtures” as personal property belonging to and removable by a tenant, we agree with the trial court that the silos do not supply a basis for a mechanic’s lien against Maxine’s real property under these circumstances. This Court has previously held that the language of KRS 376.010 applies to improvements that become a part of the realty. Barren River State Boat Dock, Inc. v. K & R Mfg. Co., 167 S.W.3d 676, 679 (Ky. App. 2005). Here, Southern’s work was limited only to ACT’s silos. The silos are trade fixtures, and by operation of law remained 2 Although this Court has few details of ACT’s bankruptcy, the Master Commissioner’s Findings of Fact and Conclusions of Law affirmatively state that ACT’s trustee in bankruptcy has waived any interest that the bankrupt estate may have had in the silos. 11 U.S.C.A. § 554(c) states that “any property scheduled under section 521(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor[.]” If the bankruptcy estate abandoned its interest in the silos, their ownership reverted back to ACT or its assigns. -15- personal property, never became a part of Maxine’s realty, and could not subject Maxine’s real property to Southern’s mechanic’s lien. Unattached personal property does not constitute an “improvement” upon the land for purposes of KRS 376.010. The statute’s plain language does not include a tenant’s personal property brought onto a landlord’s real property, used strictly for the tenant’s business and removable from that realty at the will of the tenant. As such, trade fixtures which exist solely to benefit a tenant’s business, not contemplated by either landlord or tenant to become the landlord’s property, and removable at the will of the tenant, remain the tenant’s personal property and cannot subject a landlord’s real property to a mechanic’s lien. A contrary holding would allow a party to bring its personal property onto another’s land, subject that land to a lien on the basis of that personal property, and subsequently remove or destroy the personal property as a matter of right, leaving the lien with the land. Similarly, this Court cannot classify the silos as an “other structure” as an alternative basis for Southern’s mechanic’s lien against Maxine’s real property under KRS 376.010. In Barren River, supra, we defined the term “other structure” under that statute to “includ[e] a building of the same kind or class as a house; such would not necessarily be restricted to a dwelling but would be restricted to a building permanently situated and erected upon the land.” Id. at 679. Importantly, this Court determined that a marina, which sat on floats and was attached to the banks of Barren River Lake by steel cables, did not constitute an “other structure” under the statute because it did not become “part of the realty.” Id. -16- The instant case is similar to Barren River, in that neither the marina, nor the silos, could be considered an “other structure” because neither became part of the realty. Barren River was premised upon the fact that the marina was merely floating next to, tethered onto, and not part of any realty. Here, while the silos are literally bolted onto the realty, our conclusion that the silos are trade fixtures likewise precludes us from finding that the silos are part of the realty. The silos in this case are clearly not houses, as they can be easily unbolted from the realty and transported elsewhere. However, even property that could be classified as an “other structure,” such as a house, is entitled to remain the personal property (i.e., trade fixture) of a tenant, removable from a landlord’s real property or destroyable by a tenant. See Davis' Adm'r, 4 Ky. L. Rptr. at 852 (“[I]f a man, by the permission of another, erects a house upon the other's land, it will, if the builder have no estate in the same, be the personal property of the builder[.]”) See also Hartford, 104 S.W.2d at 219 (“To constitute any chattel that has been attached to the freehold a ‘trade fixture,’ it is only necessary that it be devoted to what is known in the law of fixtures as a trade purpose, and the form or size of the annexed chattel is immaterial[.]”) Consistent with this reasoning, the United States Supreme Court held that “it is difficult to conceive that any fixture, however solid, permanent and closely attached to the realty, placed there for the mere purpose of trade, may not be removed at the end of the term.” Wiggins Ferry Co. v. O & M Ry., 142 U.S. 396, 416, 35 L.Ed. 1055 (1892). See also Van Ness, 27 U.S. at 146147 (holding that the question of whether a given article is capable of removal as a -17- trade fixture did not depend upon the form or size of the building, whether it had a brick foundation, or whether it was one or more stories high, but that the only question was whether it was designed for the purposes of trade; that a tenant could erect a large, as well as a small building; that he could erect it one or two stories high, and with such foundation as he chose; and that he would not be liable for waste in tearing down and removing a wooden building, with a stone cellar and a brick chimney, upon a lot of land which he had rented for 20 years for the purpose of carrying on the business of dairyman, and as a residence for his family and servants while so engaged.) In light of the above, because we have held that the silos are trade fixtures that did not become part of Maxine’s realty, we are precluded from also classifying them as “other structures.” Finally, yet another factor prevents this Court from finding in favor of Southern: Southern, rather than Maxine, bore the risk of nonpayment in the event of ACT’s bankruptcy. In Kentucky, a materialman (e.g., Southern), knowing that he is furnishing materials to a lessee, must ascertain and is chargeable with knowledge of provisions of a lease which might affect or prevent enforcement of a mechanic’s lien. See generally Mayfield Planing Mills v. Jackson Purchase Stock Yards Co., 248 Ky. 449, 58 S.W.2d 617 (1933). Here, Southern was properly charged with knowing that ACT’s trade fixtures (i.e., silos) would remain the property of ACT because ACT’s lease with Maxine stated as much. Southern cannot now claim that ACT’s trade fixtures belong to Maxine, simply because -18- ACT has either not yet removed them, or has attempted to abandon them, on Maxine’s property. For these reasons, the judgment of the Fayette Circuit Court is affirmed. ALL CONCUR. BRIEF AND ORAL ARGUMENT FOR APPELLANT: BRIEF FOR APPELLEE, MAXINE, LLC: J. Robert Lyons, Jr. Lexington, Kentucky George D. Smith Adam M. Back Lexington, Kentucky ORAL ARGUMENT FOR APPELLEE, MAXINE, LLC: Adam M. Back Lexington, Kentucky BRIEF FOR APPELLEE, CENTRAL BANK AND TRUST COMPANY: Martin B. Tucker Patricia K. Burgess Lexington, Kentucky ORAL ARGUMENT FOR APPELLEE, CENTRAL BANK AND TRUST COMPANY: Martin B. Tucker Lexington, Kentucky -19-

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