REALTY OR PERSONALTY?

             Huntcole LLC sold its transformer refurbishment business to 4-Way Electric Services LLC in 2014. The Asset Purchase Agreement provided that Huntcole would receive $11.5 million, in exchange for the transfer of “all . . . properties and assets, real, personal or mixed, tangible and intangible, of every kind and description.”

            Huntcole made a warranty in the APA that its included assets were related to Huntcole’s business as presently conducted or necessary to permit 4-Way to conduct Huntcole’s business after Closing similar to the businesses which were conducted by Huntcole prior to Closing.

            The APA also required that Huntcole lease commercial property to 4-Way, together with buildings, improvements, structures, fixtures, compressors, and equipment. The Lease required that 4-Way pay all taxes assessed against both the realty component as well as non-realty fixtures, inventory, merchandise, and equipment.

            4-Way announced in 2017 that it would relocate its transformer refurbishment operation. In preparation, 4-Way began detaching and removing commercial equipment from the leased space. When Huntcole learned of it, Huntcole asserted that it still owned the equipment and demanded that 4-Way desist.

            4-Way refused, arguing it had purchased the equipment from Huntcole as a consequence of the APA.

            Huntcole filed a lawsuit, seeking a declaration that it owned the equipment in the leased building as it had become permanently attached to the building. 4-Way responded with a counterclaim, asserting Huntcole had breached the APA in which it agreed to transfer to 4-Way all property owned by Huntcole necessary to conduct the transformer refurbishment business. And that the equipment within the leased building was an integral part of the transformer refurbishment operation, no matter how or if the equipment was attached.

            The trial court determined that several building improvements were scheduled in the APA as excluded assets. Finding that equipment attached to the building become building improvements and believing the APA did not alter the analysis, the court determined that 4-Way unlawfully committed conversion when it removed the equipment.

            Huntcole was awarded $1+ million in conversion damages, plus $1 million punitive damages and attorney’s fees. Judgment was rendered based on the general rule that once personal property becomes affixed, it changes character from personalty to realty. Consequently, the trial court concluded that what was once personal property refurb equipment changed character to real property, and must be surrendered to the Landlord regardless of the APA.

            However, 4-Way believed that it had purchased the equipment, whether or not it was affixed to the building, and that 4-Way had the lawful right to remove it.

            So 4-Way appealed.

            The Lease was examined on appeal. Recall that the Lease stated that Huntcole was leasing the building and all fixtures to 4-Way. If the APA controlled this issue, then Huntcole could still lease to 4-Way the equipment that Huntcole retained, consisting of additional equipment purposefully not transferred to 4-Way. Recall further that the APA did provide for the retention of some equipment by Huntcole.

            Since Huntcole was obligated to convey all assets in the APA and lease the remainder to 4-Way, 4-Way could not have converted equipment 4-Way had previously purchased from Huntcole when 4-Way removed it from the building. 4-Way owned that equipment; it was not excluded in the APA; attaching that equipment to the building did not mean that 4-Way suffered a loss of title or ownership.

            The trial court’s Judgment for Huntcole is reversed and rendered for 4-Way. See 4-Way Electric Services v. Huntcole; Supreme Court of Mississippi; Case No. 2021-CA-00778-SCT; June 22, 2023: https://cases.justia.com/mississippi/supreme-court/2023-2021-ca-00778-sct.pdf?ts=1687512815.

Questions / Issue:

            The line separating realty from personalty has never been crystal clear. This issue comes up often in the content of mechanic’s liens. Laborers and material providers with properly perfected liens have been able to lawfully remove flooring, windows, doors, roofs, conduit, wiring, elevator cabs, HVAC components, security systems, sprinkler systems, and brick siding.

            I haven’t yet seen a court allow the removal of drywall, foundations, framing, structure, and load-bearing components. But all else seems fair game unless specific provisions are added to commercial leases, addressing each addition.

                                                                     Stuart A. Lautin, Esq.*

 

* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization

Licensed in the States of Texas and New York

  

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.