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
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.
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.
* 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.