Carney Badley Spellman, P.S. is a Pacific Northwest law firm located in Seattle, Washington. Our clients will tell you we are known for providing exceptional value in legal services by recognizing case objectives early and obtaining cost-effective results. The Carney firm provides legal services in business, litigation, construction, government affairs and insurance to individuals and to privately-held and publicly-traded companies.
Recent Court Cases Raise Questions About Construction Liens
by S. Jay Terry June 2008
The law in Washington regarding Mechanics' and Materialmen's Liens is well-developed and seems to hold few surprises for seasoned contractors and their attorneys. But in the last year, two cases have highlighted a potential area where the law is unclear and could have potentially wide reaching impacts on the priority and effectiveness of liens filed by contractors and material suppliers under RCW 60.04. et. seq.
The Haselwood v. Bremerton Ice Arena, Inc. 137 Wn.App. 872, 885-888, 155 P.3d 952, 958-960 (2007); review granted, Estate of Haselwood v. Bremerton Ice Arena Inc., 163 Wash.2d 1017, 180 P.3d 1291 (Wash. Apr 02, 2008), and the recent Washington State Court of Appeals, Division III decision Union Elevator & Warehouse Co., Inc. v. State ex rel. Dept. of Transp., L 2051670, 4-7 (2008), published May 15, 2008, each address the issue of what is, or is not, a fixture. Bremerton Ice Arena does so in the context of a lien foreclosure action, while Union Elevator addresses whether Union was entitled to reimbursement for expenses incurred while installing equipment at a replacement site following a prior determination that DOT had taken the access to a grain elevator as a part of highway project (inverse condemnation). While the opinions of each court apply a similar analytical framework to the question of what is or is not a fixture, the cases create a potential conflict between the priority of Mechanics' and Materialmen's liens and UCC fixture filings and whether a mechanics' lien that is prior in time to a UCC fixture filing would retain priority if the improvements to the real property are determined to be personal property rather than a fixture.
The issue of what is or is not a fixture becomes muddled when large equipment, of a type that would normally be affixed to property, is installed during construction activities (like a 120-ton jig or milling saw from a sawmill). This question becomes especially important where equipment is supplied by an owner, the owner finances the equipment, and the lender receives UCC security interests in the equipment. The issue is further clouded for general contractors whose work precedes installation of such equipment and potentially the financing. Under RCW 62A.9A-333, "[a] possessory lien on goods has priority over a security interest in the goods only if the lien is created by a statute that expressly so provides." RCW 62A.9A-333 also states that a preparer's lien or a processor's lien "properly created pursuant to chapter 60.13 RCW [Processor and Preparer Liens for Agricultural Products] or a depositor's lien created pursuant to chapter 22.09 RCW takes priority over any perfected or unperfected security interest." Because chapter 60.04 RCW is not specifically identified by RCW 62A.9A-333, if equipment installed during an improvement to real property is found to be personal property, liens under RCW 62A.9A-333 could have priority over liens under RCW 60.04.
RCW 60.04.011(5) defines "improvements" for the purposes of the mechanic's and materialmen's liens as follows:
1. Constructing, altering, repairing, remodeling, demolishing, clearing, grading, or filling in, to, of, or upon any real property or street or road in front of or adjoining the same; (b) planting of trees, vines, shrubs, plants, hedges, or lawns, or providing other landscaping materials on any real property; and (c) providing professional services upon any real property or in preparation for or in conjunction with the intended activities in (a) or (b) of this subsection.
Under RCW 60.04.061, a
"claim of lien created by this chapter upon any lot or parcel of land shall be prior to any lien, mortgage, deed of trust, or other encumbrance which attached to the land after or was unrecorded at the time of commencement of labor or professional services or first delivery of materials or equipment by the lien claimant."
Whether large, "permanently" installed equipment is a fixture which attaches to the land or personal property is the crux of the Bremerton Ice Arena and Union Elevator cases.
In Haselwood v. Bremerton Ice Arena, Inc., the Court held that a mechanic's lien of the general contractor for tenant improvements to the Bremerton Ice Arena was prior to the lender's deed of trust despite the fact that the ice arena was public property and the lease agreement specifically stated that all improvements to the arena would be the tenant's personal property. The Court, in applying the statutory framework for mechanics' liens, found that "[t]he activities described in subsections (a) and (b) [of 60.04.011(5)] strongly suggest that the resulting improvements will be permanently affixed to, or part of, the realty." Id., see also, Pioneer Sand & Gravel Co. v. Hedlund, 178 Wash. 273, 277-78, 34 P.2d 878 (1934); Cutler v. Keller, 88 Wash. 334, 337, 153 P. 15 (1915).
Because the activities identified in RCW 60.04.011(5) generally lead to permanent improvements, a lien on such improvements usually attaches to the real property through a fixture. Notwithstanding this, the Bremerton Ice Arena Court went on to state that RCW 60.04.051 establishes a lien, "which ordinarily attaches to real property; but in the event the lien is unable to attach to the real property, the obligation may be enforced by removing the improvement."
The Bremerton Ice Arena case is important because it held that improvements to leasehold interests, even if intended to be personal property, are subject to the relation-back provision in the statutes in order to effectuate the statutory purpose to protect builders' interests. See RCW 60.04.031(4). The Bremerton Ice Arena Court reasoned that "if priority can be established only on the date of recording, supplies and labor furnished on credit would always be vulnerable to intervening recorded claims…" and that "[b]y enacting the relation-back statute, the legislature intended to safeguard the interests of suppliers and laborers, regardless of whether their improvements constitute part of the realty." See, e.g., RCW 60.04.051.
The Bremerton Ice Arena case is good news for contractors, but it is on appeal to the Washington State Supreme Court. And, unfortunately, it may be overturned because it arguably misapplies the lien statute to public property.
The fact that Bremerton Ice Arena rejects the argument of party's intent as to the nature of equipment is a fixture or personal property is also contrary to the recent holding in Union Elevator. The Court in Union Elevator held that "[u]nder Washington law, real property includes fixtures, such as machinery' that is permanently used in a particular location." Union Elevator & Warehouse Co., Inc. v. State ex rel. Dept. of Transp., L 2051670, 4-7 (2008); citing Dep't of Revenue v. Boeing Co., 85 Wash.2d 663, 667, 538 P.2d 505 (1975). However, the Court also recognized that "determining what constitutes a fixture as opposed to personal property is a difficult task, which depends on the particular facts of each case." To determine whether an item is or is not a fixture, the facts must be analyzed under the three part tests articulated in Boeing. "Under the test, personal property becomes a fixture if (1) it is actually annexed to the realty, (2) it is adapted to the use of the realty, and (3) the annexing party intended a permanent attachment." Id. All three parts of the test must be satisfied for an item to be a fixture. Id. at 668, 538 P.2d 505; citing Glen Park Assocs. v. Dep't of Revenue, 119 Wn.App. 481, 490, 82 P.3d 664 (2003). Unlike the Bremerton Ice Arena case, which ignored intent, the Union Elevator Court stated that intent is the most important element of the fixtures test and evidence of intent is garnered from the circumstances and objective evidence rather than through the party's subjective belief at the time of installation. See, Boeing, 85 Wash.2d at 668, 538 P.2d 505. The Boeing Court found that "the nature of the article affixed, the relation and situation to the freehold of the annexor, the manner of annexation, and the purpose for which annexation is made" were relevant factors to determine intent. Id.
The Boeing case is important in the Union Elevator Court's analysis of what is a fixture versus personal property. In the Boeing case, the court found that 120-ton jigs used in the manufacturing of the 747 were personal property. The Union Elevator Court cites Boeing for four factors to support its conclusion: (1) the alleged permanency of the jigs was dependent upon Boeing's continued use of the building to manufacture the 747 (the future use of the building was disputed); (2) the jigs could be removed without damage to the building, thus evincing an intent that they could be easily moved upon any changes in the program; (3) the jigs were designed to be easily disassembled and smaller jigs had been moved from plant to plant in other programs; and (4) Boeing reported the jigs as personal property for tax purposes. Id. at 669-70, 538 P.2d 505.
Following these principals, the Union Elevator Court held, based on the circumstances of the case, that "the mere adaptability of machinery to use in the business which happens to be conducted upon the realty is of itself enough to give the character of realty to the machinery." But, the machinery and apparatus were not fixtures simply because "they are placed in the shop or factory with the intent that they should remain there for permanent use, but the intent must be to make them a permanent accession to the freehold." Union Elevator, L 2051670, 4-7 (2008); citing Chase v. Tacoma Box Co., 11 Wash. 377, 385, 39 P. 639 (1895).
The court found that Union Elevator's equipment was personal property and not a fixture even though the machinery was crucial to operating the grain elevator, had been in place for more than nine years and had never intended to be moved. The court found that testimony establishing that the equipment was suitable for use in most other facilities was sufficient to preclude determination that the equipment was a fixture.
The Union Elevator Court cited Neufelder v. Third Street and Suburban Railway, 23 Wash. 470, 63 P. 197 (1900) as illustrating the point that:
"[The machinery] was not more specially adapted to that structure than to any other milling structure; that it can be used in any other mill as well as in that; that when the mill itself was buil[t] some of this machinery was contemplated, but that it was built substantially in the manner of any other sawmill, and that it can again be equipped with machinery suitable for its purposes without alteration of the structure."
Union Elevator., L 2051670, 4-7 (Wn.App. Div. 3,2008), quoting Neufelder. at 472, 63 P. 197.
If Bremerton Ice Arena is overturned, Union Elevator may be used to support the proposition that mechanics' liens premised on the installation of large equipment do not attach to personal property, even to the extent that such "permanently" installed equipment is crucial to the operation of a facility.