Hilling Lumber Company and KEH Trucking, Inc.

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: )
) CASE NO. 05-1773
HILLING LUMBER CO., )
A & K LOGGING, INC., and )
KEH TRUCKING, INC. ) Administratively Consolidated
)
Debtors. )
MEMORANDUM OPINION
Wells Fargo Financial Leasing, Inc. (“Wells Fargo”), seeks to compel disbursement of about
$209,900 in auction proceeds related to the sale of a leased commercial building and three items of
equipment. Branch Banking & Trust Company (“BB&T”) opposes the motion asserting that the amount
due to Wells Fargo is far less than $209,900 on two grounds: (1) the commercial building became part of
the Debtor’s real property, which limits Wells Fargo’s recovery of proceeds to the amount that it inserted
in the deed of trust securing the lease payments; and (2) the proceeds claimed by Wells Fargo on the
individualitems of equipment should be reduced pursuant to the parties’s sale allocation agreement. BB&T
also asserts that Wells Fargo owes it about $34,000 pursuant to an alleged private agreement for
contribution based on the costs BB&T incurred in preserving the Debtor’s assets for sale.
The court held a telephonic hearing in this matter on June 21, 2006, in Wheeling, West Virginia,
at which time the court took the matter under advisement and ordered the parties to submit supplemental
briefing. That briefing is now complete and the case is ripe for review. For the reasons stated herein, the
court will: (1) declare that the commercial building is the personal property of Wells Fargo and that the sale
proceeds from that building belong exclusively to Wells Fargo; (2) reduce the amount of proceeds claimed
by Wells Fargo related to the sale of the three items of equipment; and (3) deny BB&T’s motion for
Dated: Thursday, November 16, 2006 5:33:56 PM
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contribution due to lack of sufficient evidence showing that any agreement for contribution existed.
I. BACKGROUND
Hilling Lumber Company, A & K Logging, Inc., and KEH Trucking, Inc. (collectively the
“Debtor”) operated a logging operation from Monongalia County, West Virginia. In the ordinary course
of that business, the Debtor executed various leases with Wells Fargo, and various security agreements with
BB&T.
On April 8, 1999, Wells Fargo leased a 40x80x16' commercial building to Robert Reckart and
Robert Reckhart, Jr., which was subsequently assigned to the Debtor on January 17, 2002. Wells Fargo
does not own the 5.09 acres tract on which the building sits, and the lease gives the Debtor three options
at its termination: (1) renew the lease for the fair rental value of the building; (2) purchase the building at fair
market value; or (3) vacate and return the building. Should the Debtor elect to return the building, Wells
Fargo had the Debtor’s contractual permission to detach it from power, gas, telephone, sewer, or storm
drain lines, and to break the building away from its foundations. As security for the monthly lease payment
of $982 for a term of 84 months, Wells Fargo took a deed of trust on about seven acres of land in Clinton
District, Monongalia County, West Virginia, which contains the 5.09 acre tract on which the building sits.
The deed of trust, recorded on April 14, 1999, sets forth the payment terms of the April 8, 1999 lease,
and states that it is to secure the payment of that lease. The deed of trust further states that the principal
balance secured is $60,000.
Subsequently, the Debtor executed numerous notes with BB&T, the largest of which was executed
on April 17, 2000, in the amount of $1,400,000. BB&T secured the Debtor’s obligations under the notes
with a deed of trust on the Debtor’s real property – including the same seven acres subject to Wells
Fargo’s deed of trust – and by filing an August 18, 2000 UCC-1 statement that lists the Debtor’s
equipment as being subject to BB&T’s security interest.
On January 22, 2002, Wells Fargo and the Debtor executed an equipment lease for, inter alia, 20
Reckart Lumber Carts (the “Carts”).
On January 9, 2003, Wells Fargo and the Debtor executed a lease/purchase agreement for, inter
alia, two items of equipment: a Precision 58/60 x 8 Knife Horizontal Chipper (the “Chipper”); and a 50'
x 18"Pay Type Conveyor (the “Conveyor”). On January 27, 2003, Wells Fargo filed a financing statement
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1 BB&T contends that the total amount of debt owed to Wells Fargo under the deed of trust is
$39,442, which was the default amount due under the lease of the commercial building as stated by an
April 25, 2005 court document filed by Wells Fargo.
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covering the Chipper and the Conveyor. All of Wells Fargo’s leases and/or lease purchase agreements
with the Debtor contain cross default clauses whereby a default under one lease was considered a default
under all the leases.
The Debtor defaulted in its leases with Wells Fargo; consequently, Wells Fargo commenced an
action for money damages in the Monongalia Circuit Court, and it also noticed a foreclosure sale of the
Debtor’s real property that was subject to its deed of trust. Before these actions were completed, the
Debtor filed its Chapter 11 bankruptcy petition on April 21, 2005. On June 20, 2005, the court approved
an agreed order between Wells Fargo and the Debtor whereby the Debtor was required to make adequate
assurance payments to Wells Fargo, and if the Debtor defaulted, the leases were deemed rejected.
Thereafter, the Debtor defaulted on the terms of the agreed order, and the case converted to one under
Chapter 7 on November 10, 2005. Wells Fargo agreed to allow the Chapter 7 trustee to sell the
commercial building and the other items that it leased to the Debtor.
The trustee conducted an auction on March 4, 2006, at which the Debtor’s real and personal
property were auctioned, first pursuant to individualized bids, and then in bulk. The total of the
individualized bids was $750,000, but no individual bid was submitted for the Debtor’s real property, which
required a minimum bid of $500,000. The bulk bid, which included the real estate, was for $800,000, and
was accepted by the auctioneer and the trustee. The liens of Wells Fargo and BB&T attached to the
proceeds of that sale. Wells Fargo and BB&T have amicably divided the proceeds of the sale with the
exception of the commercial building, the Chipper, the Conveyor, and the Carts.
II. DISCUSSION
BB&T asserts that Wells Fargo is not entitled to the full proceeds representing the value of the
commercial building on the basis that the commercial building became part of the Debtor’s real property;
thus, Wells Fargo is limited to receiving its secured claim as stated in the deed of trust, which cannot be
more than $60,000.1 BB&T does not dispute that Wells Fargo has a first priority interest in the items of
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equipment it leased to the Debtor; however, it disputes the price allocation formula used by Wells Fargo
for individual equipment when all the assets of the Debtor were sold pursuant to a bulk bid – not
individualized bids. Finally, BB&T asserts that Wells Fargo owes it about $34,000 pursuant to a private
agreement, representing its half of the expenses that BB&T incurred in preserving the Debtor’s property
for auction.
A. The Real Property / Commercial Building
Wells Fargo argues that it leased the 40x80x16' commercial building to the Debtor, only the
leasehold interest in that building became property of the estate, its lease was rejected, and that any sale
proceeds attributable to the commercial building reflect a sale of its sole property.
BB&T argues that the commercial building became part of the Debtor’s real property when it was
constructed on the basis that the building has a steel beam frame, steel siding, a roof, and is attached to a
concrete pad. BB&T further argues that once the building became part of the real property, any liens on
it are governed by real property law.
“In the absence of any controlling federal law, ‘property’ and ‘interests in property’ are creatures
of state law.” Barnhill v. Johnson, 503 U.S. 393, 398 (1992). Under West Virginia law, “[t]he true
criterion of a fixture is the united application of the following requisites: (1) annexation to the realty or
something appurtenant thereto; (2) application to the use or purpose to which that part of the realty with
which it is connected is appropriated; (3) the intention of the party making the annexation to make a
permanent accession to the freehold.” 1 M.J. of Virginia & West Virginia, Fixtures § 3 (2004) (citing,
inter alia, West Virginia Dep't of Hwys. v. Thompson, 375 S.E.2d 585, 588 (W. Va. 1988)). The most
important factor is the intent of the parties. E.g., Blair v. Freeburn Coal Corp., 253 S.E.2d 547, 552
(W. Va. 1979) (“Basically, whether a fixture becomes part of the real estate to which it is affixed is
determined by the intention of the parties.”).
The following facts convince the court that the parties never intended the commercial building to
become part of the Debtor’s real property; consequently, the commercial building never lost its
classification as personal property. First, the commercial building that Wells Fargo leased to the Debtor
was never incorporated into an existing improvement on the Debtor’s real property; rather, the entire
structure was placed there by Wells Fargo. Second, the parties’ agreement specifically states that the
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building “is personal property and that title shall remain in the Lessor’s name exclusively even though affixed
to the real property.” Third, at the end of the lease term, the Debtor had three options: enter a new lease
of the building for its fair rental value, purchase the building for its fair market value, or allow Wells Fargo
to remove it from the premises, by, inter alia, disconnecting it from utility lines and removing it from its
concrete slab foundation. The fact that the Debtor could purchase the building was only one of three
options. Noticeably absent from the lease agreement is any indication that the Debtor would become the
owner of the building at the end of the lease term by paying a nominal amount of consideration. Fourth,
it appears that Wells Fargo did not extend credit to the Debtor based on any enhancement to the value of
the Debtor’s realty; it recorded a deed of trust on the Debtor’s realty only for the purpose of securing
payments under the lease. Indeed, as indicated by Wells Fargo, the value of the underlying real property
(roughly seven acres with a value of about $2,500 per acre, or $17,500) is far less than the total amount
due under the lease (84 monthly payments of $982, or $82,488).
The court’s holding in this case is in accord withthose courts applying a different State’s law based
on similar circumstances. E.g., Wiggins Ferry Co. v. Ohio & M. R. Co., 142 U.S. 396, 416 (1892) (“[I]t
is difficult to conceive that any fixture, however solid, permanent and closely attached to the realty, placed
there for the mere purposes of trade, may not be removed at the end of [lease] term.”); In re Chicago,
R. I. & P. R. Co., 753 F.2d 56, 58-59 (7th Cir. 1985) (holding that a grain elevator, permanently affixed
to the real property, belonged to the tenant that constructed the grain elevator under Iowa law because the
lease gave the tenant the right to remove all of its real and personal property at the end of the lease term
– including buildings); Van Dorn v. Bank & Trust Co. (In re Van Dorn), No. 04-7180, 2005 Bankr.
LEXIS 219 at *2-4 (Bankr. C.D. Ill. Feb. 16, 2005) (holding that a metal pole barn, affixed to a concrete
floor, with roofing and siding, was personal property subject to a lease and was not part of the real
property when the parties agreement provided that it was personal property); Jarvis v. Wells Fargo Fin.
(In re Jarvis), 310 B.R. 330, 336 (Bankr. N.D. Ohio 2004) (holding that leased hog farm buildings, set
on sturdy concrete foundations and hooked-up to utilities, did not become part of the realty under Ohio
law because, inter alia, the lease agreement provided for three options on termination: a new lease,
purchase for the fair market value, or removal).
Because BB&T has failed to show that the Debtor and Wells Fargo intended the building to
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2 In its response to Wells Fargo’s motion for disbursement of sale proceeds, BB&T states:
“Wells Fargo has argued that [the commercial building lease] is a ‘true lease.’ The concept of a ‘true
lease’, as opposed to a “financing lease’, is a personal property financing concept under the Uniform
Commercial Code and has no applicability to real property law.” (Document No. 285, ¶ 47). Thus,
BB&T did not contest whether or not the April 8, 1999 lease was a “true lease.”
3 The actual value of the real property is subject to apportionment based on the portion of the
bulk sale proceeds allocated to the Debtor’s real property.
4 BB&T asserts that a dispute exists over whether Wells Fargo was paid all amounts due under
the lease of the commercial building. That dispute is not presently before the court, and the court will
assume for purpose of this opinion that Wells Fargo’s claim arising out of the Debtor’s default of the
April 8, 1999 lease is at least $39,442.
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become part of the Debtor’s real property, the building itself never became subject to Wells Fargo’s deed
of trust because the building was always owned by Wells Fargo.2 Accordingly, any proceeds from the sale
of the commercial building belong to Wells Fargo as the owner of that building.
Any proceeds attributable to the sale of the real property, however, belong to the estate, and is
subject to the competing deeds of trust between Wells Fargo and BB&T. Because Wells Fargo’s deed
of trust was recorded before BB&T’s, Wells Fargo has the first priority in the proceeds of the sale to the
extent that it has a secured claim for unpaid rental payments. Regarding the value of the property subject
to its deed of trust, Wells Fargo states:
[T]he assessed value of the larger parcel which contains the [commercial building]
Premises is $292,200. The twelve (12) acre parcel includes roughly 5 acres which the
Deed of Trust does not encumber. Upon information and belief, the real estate is worth
approximately $2,500 per acre.
(Document No. 273, ¶ 42).
Thus, assuming that the valuation of the land as stated by Wells Fargo is accurate, the value of the
real property subject to Wells Fargo’s deed of trust is only $17,500.3 As of April 25, 2005, Wells Fargo
represented that the accelerated balance owed under the April 8, 1999 lease was $39,442, which amount
is not disputed by BB&T. Because the debt secured by the deed of trust is far in excess of the value of
the land, Wells Fargo is entitled to the entire value realized from the sale of the real property subject to its
deed of trust.4
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Wells Fargo also states that the amount of its secured claim in the Debtor’s real property
includes the purchase price value of the building on the basis that – should the Debtor exercise the
purchase option – that debt would be covered by the deed of trust. Wells Fargo, however, has not
demonstrated that the Debtor ever exercised the lease’s purchase option; therefore, no such debt exists
for the deed of trust to secure.
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B. The Conveyor, Chipper & Carts
Wells Fargo contends that it is entitled to the following amount of sale proceeds: $10,000 for the
Conveyor, $34,000 for the Chipper, and $15,900 for the Carts. These sums are based on individual bids
for the items at the auction. Wells Fargo and BB&T both state that the parties agreed to allocate the
proceeds to the individual items of equipment pursuant to the individual bids if the bulk bid was successful.
In this case the individual bids totaled $750,000 and the bulk bid was for $800,000. Therefore, Wells
Fargo contends it is entitled to the above-stated sale proceeds, which represents the full value of the
individualized bids for those items.
BB&T does not contest that Wells Fargo is entitled to a priority portion of the proceeds
representing the sale of the Chipper, Conveyor and Carts. BB&T, however, disagrees with how Wells
Fargo has allocated the proceeds to those items.
According to BB&T, when the Debtor’s real property and equipment were auctioned individually,
no party submitted a qualified bid for the Debtor’s real property; thus, the full $750,000 represented the
bids solely submitted for individualized items of equipment. On March 2, 2006, before the auction, the
parties held a meeting – which Wells Fargo failed to attend – whereby the minimum bid for the real
property was set at $500,000. BB&T alleges that this number was agreed-on so that the sale of the real
property would be valid under West Virginia law and not be subject to a subsequent attack based on
inadequate consideration. The bulk bid of $800,000, of course, was only $50,000 more than the
individualized bids submitted solely for the equipment. The auctioneer’s report reflects that the purchaser
paid $300,000 for Debtor’s equipment. Therefore, according to BB&T’s interpretation of the agreement,
the individual prices received for the equipment alone must be reduced in proportion to the allocation
between the real and personal property in the bulk sale. Consequently, BB&T asserts that the amount of
sale proceeds Wells Fargo is entitled to from the sale of the Chipper is not $34,000, but is $13,600
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($300,000 / $750,000 x $34,000).
Wells Fargo argues that it did not attend the March 2, 2006 meeting, it never agreed to an
allocation of $500,000 for the sale of the real property, and that it is not bound by any agreement made
at the meeting. Whether or not Wells Fargo attended that meeting or agreed to the minimum allocation to
the real property is irrelevant – the auctioneer’s report allocates $300,000 of the $800,000 purchase price
to the Debtor’s equipment and Wells Fargo has not sought to set-aside the results of the auction.
Both parties relate that they had an agreement to allocate the proceeds of the bulk sale based on
the individualized bids for the Chipper, Conveyor, and Carts. The parties did not expressly agree,
however, on what would happen if the allocation given to the Debtor’s equipment in the bulk bid was
substantially lower than the aggregate amount of the individualized bids. “When the parties to a bargain
sufficiently defined to be a contract have not agreed with respect to a term which is essential to a
determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the
court.” Restatement (Second) Contracts § 204 (1981). In supplying a term, the court should supply one
that is reasonable in light of the purpose of the contract, considering what term the parties would have
agreed to if the questions had been brought to their attention, and impose a term that “comports with
community standards of fairness and policy . . . .” Id. cmt. (d); see, e.g., Patten v. Signator Ins. Agency,
Inc., 441 F.3d 230, 236 (4th Cir. 2006) (“In certain instances, when the contracting parties have failed to
specify a term that is essential to the determination of their rights and duties under an arbitration agreement,
the [court] may supply a term that is ‘reasonable in the circumstances.’ ”), cert. denied, 2006 U.S. LEXIS
7811 (Oct. 16, 2006); Haslund v. Simon Property Group, Inc., 378 F.3d 653, 655 (7th Cir. 2004) (“If
contracting parties had to provide for every contingency that might arise, contract negotiations would be
interminable. Contracts can be shorter and simpler and cheaper when courts stand ready to fill gaps and
resolve ambiguities in the minority of contracts that get drawn into litigation.”).
The court believes that the argument presented by BB&T best represents what the parties would
have agreed to in advance of the auction had they considered the matter, and that it best comports with
community standards of fairness and policy, for the following reasons: (1) the fact that the bulk bid would
be different from the aggregate of the individual bids was nearly certain; (2) the parties did not know in
advance what the ultimate allocation would be between the real and personal property; (3) the parties
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plainly contemplated that the proceeds to which Wells Fargo would be entitled from the bulk bid would
be tied to the amount of the individualized bid for the specific item; (4) had the price allocation for the bulk
equipment sale been higher than the aggregate of the individual bids, then Wells Fargo would have been
entitled to a greater amount of the bulk sales proceeds than it would have received for the individual bids;
(5) without reference to the individual bids, it would be difficult to make an allocation for individual items
of equipment from the bulk sale proceeds; and (6) only a finite amount of bulk sales proceeds are available
– to give effect to Wells Fargo’s argument would mean that the value of the real property is only $50,000,
which is expressly contrary to the auction report.
Therefore, the court concludes that Wells Fargo is entitled to $13,600 in proceeds from the sale
of the Chipper; $4,000 from the sale of the Conveyor, and $6,360 from the sale of the Lumber Carts.
C. Agreement to Split Expenses
BB&T states that it and Wells Fargo agreed to split expenses for the costs incurred in protecting
the Debtor’s West Virginia property that was auctioned on March 4, 2006. BB&T further asserts that
Wells Fargo has refused to perform under that agreement and that its one-half share of the expenses total
$34,039.87.
Wells Fargo responds that it never agreed with BB&T to split the expenses associated with the
auction sale. In a February 22, 2006 email from Todd Hannah at BB&T to David DiVencenzo, the
regional collection manager at Wells Fargo, BB&T sent a breakdown of BB&T expenses and requested
payment. David DeVencenzo’s affidavit, however, states that Wells Fargo never agreed to share any of
BB&T’s expenses.
The burden of proving that a contract exists rests on the proponent of that contract. E.g., McCully
v. McLean, 37 S.E. 559, 560 (W.Va. 1900) (“The burden of proving this contract rested upon the plaintiff
and it should have been established by a preponderance of the testimony.”). The email message that BB&T
sent to Wells Fargo on February 22, 2006, without more, is insufficient to carry BB&T’s burden of proof
that an agreement existed between the parties to split the expenses of preserving the Debtor’s assets for
auction because it fails to show that Wells Fargo ever assented to such an arrangement. Therefore, the
court will deny BB&T’s request for contribution from Wells Fargo.
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III. CONCLUSION
Therefore, Wells Fargo will be declared the owner of the 40x80x16 commercial building, will be
entitled to the proceeds of the sale of the seven acres of land that is subject to its deed of trust, and will be
entitled to the proceeds from the sale of the Chipper, Conveyor, and the Carts in the amounts set forth
above. The court will deny BB&T’s request for contribution, and the court will direct the auctioneer to
disburse auction proceeds consistent with this Memorandum Opinion. The court will enter a separate order
pursuant to Fed. R. Bankr. P. 9021.
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