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K & L Distributors v. Kelly Electric (12/15/95), 908 P 2d 429
NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501; (907) 264-0607.
THE SUPREME COURT OF THE STATE OF ALASKA
K & L DISTRIBUTORS, INC., )
GARY LEVINE, MARK BENNETT ) Supreme Court No. S-6254
LEVINE, MIKE KOBYLK, and )
JOSEF DIAMOND, executor for ) Superior Court No.
the estate of VIOLETT DIAMOND, ) 3KN-92-1065 CI
Appellants, ) O P I N I O N
v. ) [No. 4297 - December 15, 1995]
KELLY ELECTRIC, INC., )
Appeal from the Superior Court of the State
of Alaska, Third Judicial District, Kenai,
Jonathan H. Link, Judge.
Appearances: Roy Longacre, Longacre &
Associates, Anchorage, for Appellants. Phil
N. Nash, Kenai, for Appellee.
Before: Moore, Chief Justice, Rabinowitz,
Matthews, Compton, and Eastaugh, Justices.
This appeal requires us to determine whether a real
estate lender has a security interest in fixtures annexed to the
mortgaged property as a result of a previously recorded deed of
trust. Presuming such an interest exists we must also determine
whether it survives severance of the fixtures from the real
I. FACTS & PROCEEDINGS
K & L Distributors, Inc.1 (K & L) sold a piece of real
property in Soldotna and the warehouse located thereon to
Seafoods From Alaska, Inc. In conjunction with the sale K & L
took a deed of trust for the unpaid balance of the purchase price
and recorded its interest on June 22, 1988.
The warehouse apparently needed substantial work to
operate as a functioning fish processing facility.2 Seafoods
From Alaska hired Kelly Electric, Inc., to supply and install the
building's electrical needs. Kelly Electric performed work at
the warehouse between late 1988 and the end of the summer of
1991. At that point the management of Seafoods From Alaska
realized that they were in financial difficulty. Karl Sederholm,
president of Kelly Electric, testified in a deposition that
Seafoods From Alaska, Inc.
didn't know when they would be able to get my
bill caught up or continue with their
construction and expansion in there, and that
if there was anything I could use, that I
should go ahead and use it.
Kelly Electric proceeded to remove some of the equipment it had
installed, including "some disconnects and some [circuit]
breakers and some light fixtures." All of the wiring which Kelly
Electric had installed was left intact, and in order to remove
the circuit breakers, four nuts were loosened.
Sederholm testified in his deposition that he
considered the arrangement to be that they were giving him back
some of his material as payment on the account. He also
testified that he had no actual knowledge of either K & L's
interest in the property or the impending foreclosure.
Following default, K & L noticed and conducted a non-
judicial foreclosure sale pursuant to AS 34.20.070. K & L was
the highest bidder at the trustee's sale and took possession of
the property on or about October 24, 1991. Upon taking
possession of the property, K & L realized that some of the
electrical equipment had been removed.
K & L then brought suit against Kelly Electric,
alleging that K & L held a beneficial interest in the property
because it held a deed of trust, and that Kelly Electric had
damaged the previously secured property by removing the
electrical equipment.3 Kelly Electric moved for summary judgment.
The superior court granted Kelly Electric's motion. In its order
granting summary judgment, the superior court noted:
The court finds the items removed were
fixtures, Interior Energy Corp. v. Alaska
Statebank, 771 P.2d 1352 (Alaska 1989) and
that Kelly Electric was acting at the behest
of the owners - Kelly was not a tenant -
Plaintiffs recourse is against [Gary Ervin
and Roland Schwanke], not Kelly.
K & L now appeals.
II. STANDARD OF REVIEW
We review a grant of summary judgment using our
independent judgment. The "court must determine whether any
genuine issue of material fact exists and whether the moving
party is entitled to judgment on the law applicable to the
established facts." Wright v. State, 824 P.2d 718, 720 (Alaska
1992). Because the facts of this case are uncontroverted, the
dispositive question in this case is one of law. "This court is
not bound by a lower court's resolution of questions of law, and
has the duty to adopt the rule of law most persuasive in light of
precedent, reason and policy." Department of Health and Social
Servs. v. Alaska State Hosp. and Nursing Home Ass'n, 856 P.2d
755, 758 (Alaska 1993).
As is explained below, we think that the superior court
correctly ruled that the items removed were fixtures. However,
as is also explained below, once the items are determined to be
fixtures, Article 9 of the U.C.C. requires that K & L be found to
have an interest in them, even when the items are in the hands of
The superior court characterized the removed items as
fixtures. AS 45.09.313(a)(1) provides that "goods are 3fixtures3
when they become so related to particular real estate that an
interest in them arises under real estate law." Fixtures are
items of personal property that become "so affixed or otherwise
so related to real estate that they become part of the real
estate." U.C.C. ' 9-313 cmt. 1 (1972). AS 45.09.313(b) provides
that "[a] security interest under this chapter may be created in
goods which are fixtures or may continue in goods which become
fixtures, but no security interest exists under this chapter in
ordinary building materials incorporated into an improvement on
land." Thus, fixtures are to be distinguished from "ordinary
building materials which have become an integral part of the real
estate and cannot retain their chattel character for purposes of
finance." U.C.C. ' 9-313 cmt. 3 (1972). Although U.C.C. ' 9-313
was drafted to clarify various creditors' relative priorities in
fixtures, the threshold determination of whether a particular
item is a fixture is not governed by the U.C.C., but rather by
pre-existing state property law. Cain v. Country Club
Delicatessen of Saybrook, Inc., 203 A.2d 441, 446 (Conn. Super.
In determining whether a particular item is a fixture,
three factors should be considered: "the manner in which the
attachment is made, the adaptability of the thing attached to the
use to which the realty is applied, and the intention of the one
making the attachment." Hayes v. Alaska Juneau Forest Indus.,
Inc., 748 P.2d 332, 336 (Alaska 1988) (quoting Montana Elec. Co.
v. Northern Valley Mining Co., 153 P. 1017, 1018 (Mont. 1915)).
Applying this test to the facts of the present case, we
agree with the superior court that the items removed by Kelly
Electric were fixtures rather than personal property or ordinary
building materials. The various items of property removed
included industrial lighting and circuit breakers. These items
were wired into the warehouse's electrical system but apparently
could be removed without damaging the warehouse structure. To
remove the breakers, only four bolts had to be unscrewed. The
lighting was necessary to prepare the building to be used as a
functioning processing facility, and it is therefore reasonable
to infer that Seafoods From Alaska intended that the installed
devices would be permanent. Given the above, we conclude that,
as a matter of law, the removed items were fixtures. See
Equibank v. I.R.S., 749 F.2d 1176 (5th Cir. 1985) (chandeliers
which were physically connected to internal wiring in house were
fixtures and therefore subject to mortgage on residence).
Some deeds of trust contain specific after-acquired
property clauses, which give the mortgagee5 a security interest
in fixtures or improvements annexed after the mortgage is
granted. See McIlroy Bank & Trust Fayetteville v. Federal Land
Bank of St. Louis, 585 S.W.2d 947, 948 (Ark. 1979). In the
present case, K & L's deed of trust gives it a security interest
in the real property "[t]ogether with the tenements,
hereditaments, and appurtenances thereunto belonging, or in
anywise appertaining." While on its face this language does not
appear to apply to after-acquired property, it has been held that
similar language was sufficient to give a mortgagee an interest
in a fixture acquired and annexed after the grant of the
mortgage. See Matter of Cliff's Ridge Skiing Corp. 123 B.R. 753,
762 (Bankr. W.D. Mich. 1991) (held that clause reading "real
property together with the hereditaments and appurtenances
thereunto" gave mortgagee security interest in after-acquired
Even if the deed language is insufficient to give K & L
a security interest in the fixtures, the general common law rule
is that "[w]hen a fixture becomes complemental to real property,
it becomes . . . part of the realty, [and] the fixture becomes
part of the security with regard to any existing mortgage. A
mortgage covers fixtures even when they are not expressly
mentioned in the mortgage." Id. at 760 (citations omitted).6
Kelly Electric, on the other hand, neither signed nor
perfected a security agreement to secure the credit it extended
to Seafoods From Alaska.7 Thus, Kelly Electric was no more than
an unsecured creditor as to the fixtures.8 Because the holder of
a properly perfected security interest has priority in the
security over an unsecured creditor, K & L's interest is
Kelly Electric tried to characterize its removal of the
property as a payment on Seafoods From Alaska's account.
Although Kelly Electric gave value to Seafoods From Alaska,9 this
does not affect K & L's security interest in the affixed property
unless Kelly Electric was a bona fide purchaser. A bona fide
purchaser is one who "acquired title without notice, actual or
constructive, of another's rights and also must have paid value
for the same." State v. 18,018 Square Feet, More or Less, 621
P.2d 887, 890 n.5 (Alaska 1980) (quoting Sieger v. Standard Oil
Co., 318 P.2d 479, 484 (Cal. Dist. App. 1957)).
Sederholm testified at his deposition that he had no
actual knowledge of either K & L's interest in the property or
the impending foreclosure. K & L presented no evidence which
would dispute this testimony. Nonetheless, Kelly Electric had
constructive notice of K & L's interest. This is because K & L
had properly recorded a deed of trust covering the affixed
property prior to Kelly's installation and subsequent removal of
the fixtures. At the time Kelly Electric removed the items from
the realty, it knew they were fixtures and reasonably should have
known that they were subject to a previously recorded deed of
trust on the property.10 Thus, we hold that Kelly Electric is not
a bona fide purchaser of the property in question, and it
therefore took the property subject to K & L's security interest.
Based on the foregoing, we conclude that K & L's
security interest in the removed fixtures followed the property
into the hands of Kelly Electric. Therefore, we REVERSE AND
VACATE the superior court's grant of summary judgment in favor of
Kelly Electric. We REMAND this matter to the superior court with
directions to reinstate Kelly Electric as the defendant and for
such other proceedings as are consistent with this opinion.
1 Appellants Gary Levine, Mark Bennett Levine, Mike
Kobylk, and Josef Diamond, executor of the estate of Violett
Diamond, are listed on the deed of trust as co-beneficiaries with
K & L of the property at issue in this case. We refer to
appellants collectively as K & L.
2 Gary Ervin, one of the principals of Seafoods From
Alaska, testified at his deposition that the company planned to
convert the warehouse into a "secondary processing facility."
When purchased in 1988, the facility had only minimal
improvements. Ervin testified that one-third of the warehouse
had only a dirt floor, that the ceiling and roughly two-thirds of
the walls had insulation and that there were one or two small
offices inside. All together, Seafoods From Alaska spent roughly
$800,000 renovating the building.
3 The initial complaint also listed Gary D. Ervin and
Roland W. Schwanke as defendants in this action. Ervin and
Schwanke were principals in Seafoods From Alaska, Inc. K & L
eventually dismissed its complaint against Schwanke and Ervin,
and they are not parties to this appeal.
4 See also 2 James J. White & Robert S. Summers, Uniform
Commercial Code ' 26-8, at 519 (3d ed. 1988) (stating that U.C.C.
' 9-313(1)(a) "is merely an invitation to read the real estate
statutes and the local case law on what is and what is not a
5 The rights of a mortgagee under a mortgage are the same
as those of a beneficiary of a deed of trust with respect to the
subject matter of this opinion. We therefore use the terms
6 See also In re Ladd, 21 B.R. 579, 582 (Bankr. D. Me.
1982) ("It is the general rule that where annexation of chattels
to land is such as to make them fixtures, in the absence of an
agreement to the contrary, the fixtures are subject to a
mortgage. . . . It has been held that even fixtures attached to
realty subsequent to a mortgage pass to the mortgagee by
affixation."); Alamosa Nat'l Bank v. San Luis Valley Grain
Growers, Inc., 756 P.2d 1022, 1027 (Colo. App. 1988) ("A real
estate deed of trust attaches automatically to buildings and
personal property which attaches to the land after execution of
the deed of trust in such a way as to take on the character of
real estate, i.e., which become fixtures."); Tifton Corp. v.
Decatur Fed. Sav. & Loan Ass'n, 222 S.E.2d 115, 117 (Ga. App.
1975); 1 Grant S. Nelson & Dale A. Whitman, Real Estate Finance
Law, ' 9.3, at 811 (1993) ("[t]o the extent that such
improvements are considered fixtures[,] . . . `the mortgagee may
enjoy the resulting benefit without the need of an after-acquired
property clause'") (quoting 3 Glenn, Mortgages 1450 (1943)).
7 Had it chosen to do so, Kelly Electric could have
secured a priority interest in the installed electrical fixtures
as a purchase money lender under U.C.C. ' 9-313(4)(a) (codified
at AS 45.09.313(d)(1)). This statute states that a purchase
money lender which perfects its interest in the fixtures within
ten days after the goods become fixtures has priority over a real
estate encumbrancer. AS 45.09.313(h) authorizes a secured party
to remove fixtures on default subject to specified statutory
8 As for its labor and other materials, Kelly Electric
does not claim it has a lien for labor or material furnished, or
any other lien arising out of its work on the property. Nor does
it appear that it would be entitled to such a lien. AS
34.35.060(c) states that a previously recorded encumbrance on the
realty has priority over these types of liens unless the labor or
materials provided are "in [the building's] original
construction;" see also Lynch v. McCann, 478 P.2d 835 (Alaska
1970) (holding that a new addition to a building was not original
construction and therefore associated mechanics' liens were
subordinate to prior recorded deeds of trust).
9 The general definition section of the U.C.C.
states that "a person gives 3value3 for rights if the person
acquires them . . . in total or partial satisfaction of a pre-
existing claim." AS 45.01.201(45).
10 AS 40.17.080(a) states in part:
[F]rom the time a document is recorded in the
records of the recording district in which land
affected by it is located, the recorded document
is constructive notice of the contents of the
document to subsequent purchasers and holders of a
security interest in the same property or a part
of the property.