Senate Bill 1305 /House Bill 1591 if passed would completely rewrite Article 9 of Chapter 25 (UCC) of the North Carolina General Statutes. The purpose of the amendment is to incorporate changes to conform the statute to modern business practices, including electronic commerce. There are conforming changes to other articles of the UCC as well as changes responsive to problems not adequately addressed in the prior version.

This amendment or one substantively similar is pending or has been passed in the majority of the states. No state has rejected the amendment but a few have parked it in committee, effectively killing the bill for the time being. We have not done an extensive analysis or comparison of the North Carolina bill but it is our understanding that it incorporates changes from the Uniform Act to conform it to unique aspects of North Carolina law. Space does not permit a complete analysis of the proposed changes but we will attempt to briefly discuss the provisions that will be of particular interest to title examiners.

The proposed revisions to Article 9 include a commitment to centralized filing. Financing statements are to be filed in one place in each state. The proposal will accommodate electronic communications, records and filing. A significant change has been incorporated by replacing a definition of signing with one of "authentication". This definition would authorize the electronic execution of secured instruments under the Article. Propounders of the revision expected that electronic filing of financing statements would replace paper filing and where the Article has been adopted, this has tended to be the case. If passed, the revised Article 9 will only recognize local filing of financing statements securing real estate fixtures.

Fixtures are items of personal property that become physically attached to the real estate, and are treated as part of the real estate until severed from it. The new NCGS Sec. 25-9-334 will provide for the priority of security interests in fixtures and crops. NCGS Sec. 25-9-334(a) states that a "security interest does not exist under this Article in ordinary building materials incorporated into an improvement on land." Liens for building materials will still be covered by Chapter 44A. The rules of priority for fixtures have not been drastically altered and can be summarized as follows.

Purchase-money security interests have priority over existing interests of non-debtor owners and lien holders if the security interest is perfected, prior to, or within, twenty days (ten days under the existing statute.) of attachment. (NCGS Sec. 25-9-334(d))

Filed security interests have priority over senior liens if they involve readily removable factory or office machines, equipment that is not primarily used in the operation of the real property, or replacements of domestic appliances that are consumer goods if perfected before attachment. (NCGS Sec. 25-9-334(e))

The security interest created in a manufactured home in a manufactured-home transaction and perfected pursuant to a statute described in G.S. 20-58 and G.S. 75A-41 has priority over the interest of a non-debtor owner or senior lienholder. (NCGS Sec. 25-9-334(e)(4)), (NCGS Sec. 25-9-311(a)(2))

A conflicting lien is subordinate if it attaches after perfection and filing of the security interest. (NCGS Sec. 25-9-334(e)(1))

A perfected security interest in crops growing on real property has priority over a conflicting interest of a lienholder or owner of the real property if the debtor has an interest of record in or is in possession of the real property except as provided in G.S. 42-15. (NCGS Sec. 25-9-334(i))

Interests not covered by this section are governed by state law. (NCGS Sec. 25-9-334(c))

Priority of construction loans is provided for in NCGS Sec. 25-9-334(h). A construction mortgage, as defined under the section, is one that secures an obligation incurred for the construction of an improvement on land, including the acquisition cost of the land. It must indicate that it secures a construction loan and it must be recorded. Except as provided in subsections (e) and (f) of the section, a construction mortgage has priority over a security interest in fixtures if the mortgage is recorded before the goods become fixtures. This would apply even though the goods became fixtures before the completion of construction. Funding in excess of the construction and acquisition costs would apparently, not enjoy priority. A mortgage given to refinance a construction mortgage has this priority to the same extent as the construction mortgage. Funding in excess of the refinance amount would not enjoy this priority if the wording of the statute is interpreted literally. This provision would seem to provide construction lenders with the same protection, with respect to fixture filings, as Articles 7 and 9 of NCGS Chapter 45 provide with respect to lien creditors. Compliance with Chapter 45 is required for priority over other lienholders and would satisfy the requirements of this section.

NCGS Sec. 25-9-337 would provide new rules of priority of security interests in goods covered by a certificate of title. Under the existing Code, Article 9 rules of perfection, filing and priority do not apply to property regulated under the Chapter 20 Motor Vehicle statutes unless it is held as inventory, see Bank of Alamance v. Isley, 74 N.C.App. 489, 328 S.E.2d. 867, (1985). The new statute provides that if "while a security interest in goods is perfected by any method under the law of another jurisdiction, this State issues a certificate of title that does not show that the goods are subject to the security interest or contain a statement that they may be subject to security interests not shown on the certificate:

(1) A buyer of the goods, other than a person in the business of selling goods of that kind, takes free of the security interest if the buyer gives value and receives delivery of the goods after issuance of the certificate and without knowledge of the security interest; and

(2) The security interest is subordinate to a conflicting security interest in the goods that attaches, and is perfected under G.S. 25-9-311(b), after secured party's knowledge of the security interest."

This provision seems to follow the priority rules of the motor vehicle registration acts, but may actually provide opportunities for uncertainty in priority when dealing with manufactured housing. This may be best illustrated by the following example. A resident of the State of Confusion buys a manufactured home from a dealer in that ‘state’. A title is not issued for this type of unit in that jurisdiction, so the balance of the purchase price is secured by a note, security agreement and fixture filing in that State’s central filing office. A bill of sale and the manufacturer’s certificate of origin are delivered to the buyer with the finance and warranty documents. Before the unit is affixed to the buyer’s property, the buyer sells the unit to Bubba and Bertha Mae Stumpjumper, both North Carolina residents, giving them a bill of sale, the certificate of origin and warranty documents. Bertha and Bubba borrow the money to have the unit moved, axles and tongue removed and the unit installed on a permanent foundation on a lot in Gates County North Carolina. The lender secures the note with a security agreement and fixture filing recorded in the Gates County Register of Deeds 14 days after installation of the unit on the lot. On the day of purchase the Stumpjumpers secure a note financing the purchase of the unit with a security agreement and deliver the certificate of origin to the lender. That lender applies the next day for a title showing the lien from the North Carolina Department of Motor Vehicles. The first buyer’s note contained a prepayment penalty and the proceeds are insufficient to pay off the original loan. Also on the day of purchase, the Stumpjumpers secure a note for the balance of the purchase price of the lot and lot improvements with a deed of trust encumbering the lot and appurtenances. The deed of trust is recorded on the day of purchase along with the deed and an instrument declaring the Stumpjumpers’ intention to permanently affix the, clearly identified, unit to the described lot. The Stumpjumpers make payments for a period of time and then default on all three loans. "Who’s on first?" A good argument can be made that the lot lender would be in first position followed by the title lender, then the mover and finally the original seller, based upon real property law and the construction mortgage provisions. Reasonable arguments can also be made for different orders of priority after the lot lender, if you consider the applicability of the purchase money provisions as taking precedent over building materials.

This hypothetical does not presuppose any intentional dishonesty but does illustrates that individuals with less than sterling scruples could easily create great problems. In order to provide more certainty it may be advisable to remove all manufactured housing designed to be permanent or semi-permanent residences (as opposed to camping trailers) from DMV title registration since these units are not designed, or intended, for over-the-road use other than intermittent siting. Lost revenues could be recovered by imposing special fees on these units for over-the-road permits when they are being moved for siting. In addition, Article 9 should address Manufactured Housing (in particular, modular units) as building materials. This would result in their being treated consistently with other goods that are incorporated into a structure affixed to real property. In the alternative, Article 9 could address Manufactured Housing (including modular units) as a specific categories of goods and set out rules that take in to account their unique characteristics. The siting of these units blends aspects of mortgage, purchase, construction and materials. Their increasing cost and widespread utilization requires greater certainty in the securitization of their financing.

Passage of this legislation should not have a major impact on title examination or property closing procedures. Real property attorneys would be well advised to scrutinize financed transactions involving manufactured housing units delivered from outside of North Carolina.