Court Says No Take Backs to Manufactured Home Seller

Manufactured homes are unlike traditional housing. They are built off-site and must comply with HUD Title 6 construction standards which require, among other things, that they be built on a permanent chassis so that they can be moved to different locations. But differences in construction are not the only thing which make manufactured homes unique. They also pose unique legal issues, such as whether they are a chattel (personal property), like your car or a boat, or whether they are a fixture (real property), like your kitchen cabinets. This distinction makes for more than just interesting (or, perhaps, not so interesting) law school banter, but has real-world implications, as one contractor found out.

In Vieira Enterprises, Inc. v. City of East Palo Alto, Case No. A132754 (August 15, 2012), the Court of Appeals for the First District held that a manufactured home seller which had contractually attempted to retain title to the manufactured homes it sold to a property owner until payment was received in full, lost its right to claim that the manufactured homes were personal property by recording mechanics liens and filing suit to foreclose on its mechanics liens and treating the manufactured homes as though they were real property.

In Vieira Enterprises, Vieira, an authorized dealer of Fleetwood Manufactured Homes, entered into contracts to install several manufactured homes in the City of East Palo Alto, California (“City”). Under the terms of the contracts, Vieira retained title to the manufactured homes until payment in full, reserved its right to immediately take possession of the manufactured homes if payment was not received in full, and provided that the manufactured homes would retain its character as personal property and not become affixed to or become any part of any real property without the express written consent of Vieira.

After the manufactured homes were installed by Vieira, the purchasers failed to pay. Thereafter, Vieira recorded mechanics liens on the properties where the manufactured homes were located and later filed suit to foreclose on the mechanics liens, which was later dismissed without prejudice. Apparently referring to the mechanics lien forms recorded by Vieira, the Court of Appeals noted that the Vice President of Vieira had stated under penalty of perjury that the manufactured homes had been “installed.”

After the manufactured homes were installed, Polo Investment Fund No. 1 (“Polo”), which had issued a loan to the property owners, foreclosed on the properties. Another lender, Coast Capital Income Fund I, LLC (“Coast Capital”), which became the successor in interest to Polo, later applied to the City’s Building Department for issuance of notices of installation pursuant to Health and Safety Code section 18551. Under Section 18551, a manufactured home is deemed to be a fixture once notices of installation are recorded. However, pursuant to Section 18551, the City was supposed to determine whether there were any liens before issuing the notices of installation, but it failed to do so. Vieira then filed a lawsuit against Polo, Coast Capital and the City claiming that its substantive due process rights were violated when the City failed to take notice of Vieira’s mechanics liens when it issued the notices of installation and that the City’s actions constituted a constitutional taking without just compensation.

The Court of Appeals disagreed. Applying a three-pronged test under the common law on fixtures, the Court held that when determining whether personal property has become a fixture it considers three factors: (1) physical annexation; (2) adaption to use with real property; and (3) intention to annex the reality. Of these, explained the Court, intention is the most significant, and here, Vieira recorded mechanics liens under penalty of perjury stating that the manufactured homes had been “installed,” and had further alleged in its complaint foreclosing on the mechanics liens that it had fully performed its obligations under the contacts which included Vieira’s obligation to “install” the manufactured homes on their “foundations.”

The Court rejected Vieira’s argument that Health & Safety Code section 18551 – which provides detailed requirements which must be met in order for a manufactured home to retain its character as chattel as opposed to a fixture – preempted the common law on fixtures. Distinguishing the common law on fixtures from Section 18551, the Court stated that the common law on fixtures and Section 18551 “do not govern the same subject matter,” and that Section 18551 is “concerned solely with the regulation of [manufactured] homes for construction, taxing, and the issuance of permits for the operation of mobilehomes” not property rights and, further, that Section 18551 expressly provides that “[n]o provision of this subdivision are intended, nor shall they be construed, to affect the ownership interest of any owner of a manufactured home or mobilehome.” Thus, the common law on fixtures was determinative not Section 18551, and because Vieira had expressed its intent that the manufactured homes had been” installed” and therefore fixtures, Vieira had no viable claim that its due process rights had been violated or that the City’s actions constituted an unconstitutional taking without just compensation.

For manufactured home contractors, Vieira Enterprises is a hard pill to swallow as the manufactured home industry has historically relied on Health and Safety Code section 18551 to establish whether a manufactured home is a chattel or fixture and their rights thereunder.  The case  underscores the importance for manufactured home contractors to give careful consideration before recording a mechanic’s lien as it may be found to be inconsistent with and override the terms of their contracts.

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