Previous readers of Gislason & Hunter’s Financial Newsletter may recall discussion of a recent case decided by the Minnesota Court of Appeals regarding considerations to make in determining whether a grain bin is a fixture (and thus part of the real estate that can be pledged through a mortgage) or is personal property (and thus can be pledged through a security agreement). More specifically, the Court of Appeals established four factors that should be considered in making such a determination: (1) whether the grain bin can be removed without leaving the real property in a substantially worse condition than before; (2) whether the grain bin can be removed without breaking it into pieces and damaging the grain bin itself; (3) whether the grain bin has any independent value once removed from real property; and (4) the intent of the parties. This article addresses the first time that these factors were put to the test.
After the Court of Appeals’ decision in the case, titled Lighthouse Management, Inc. v. Oberg Family Farms et al., the matter was remanded to the District Court for further proceedings. In October of 2022, the District Court held an evidentiary hearing to determine whether the grain bins constituted real-estate fixtures or personal property. The parties retained experts who each testified regarding their opinions as to how the grain bins fit into the four factors established by the Court of Appeals. The experts agreed on some factual matters, including that (1) the grain bins were moveable and retained some independent value, (2) the grain bins were attached to concrete foundations only by nuts and anchor bolts, and could be moved by unscrewing those nuts from the anchor bolts, and (3) the grain bins required a concrete foundation and could not be placed directly on the ground. However, the experts diverged as to their opinions on other facts about the grain bins, including (1) the amount of work necessary to move the grain bins, (2) the condition and utility of the concrete pads following removal of the grain bins, and (3) the value of the gain bin components once moved.
After being presented with the evidence and expert opinions, the District Court noted that the Court of Appeals did not address whether the concrete foundations of the grain bins should be considered part of the structures for purposes of the four-factor analysis. The District Court ultimately determined that the concrete pads should be considered part of the structures, noting that “[t]here would be no reason to build a cement foundation of this nature, except for placing a grain bin on the foundation.” With that in mind, the District Court weighed the four factors from the Court of Appeals as follows:
- Factor 1: Whether the grain bin can be removed without leaving the real property in a substantially worse condition than before. The District Court determined that this factor supported the grain bins being classified as real property because (a) the concrete foundations constituted part of the structures and (b) removal of the foundations would cause substantial damage to the real property.
- Factor 2: Whether the grain bin can be removed without breaking it into pieces and damaging the grain bin itself. The District Court determined that this factor supported the grain bins being classified as real property because (a) the concrete foundations constitute part of the structures, (b) the foundations cannot be removed without being broken into pieces, and (c) the grain bins therefore cannot be removed without damaging the structures.
- Factor 3: Whether the grain bin has any independent value once removed from real property. The District Court determined that this factor supported the grain bins being classified as personal property because they retain at least some independent value once removed from the real property.
- Factor 4: The intent of the parties. The District Court determined that insufficient evidence was provided to make a determination regarding the subjective intentions of the parties. Therefore, the District Court concluded that this factor favored none of the parties.
Based on this analysis, the District Court concluded that because two factors weighed in favor of the grain bins being categorized as real property and because only one factor weighed in favor of the grain bins being categorized as personal property, the grain bins constituted real property.
As of the date this article is written, it is yet to be seen whether another appeal will be taken from the District Court’s latest decision. However, there are various takeaways to be drawn from the District Court’s decision. First, expert testimony will likely be necessary as to each of the factors if a case including these questions goes to trial. Second, if a grain bin sits on a concrete structure, it is difficult to see how the Court of Appeals’ first two factors would not weigh in favor of the grain bin being classified as real property. Third, it is likely an open question as to the types of facts a court will deem important in assessing the intent of the parties. Lastly, it is also likely an open question as to what a court should or will do if it determines that two factors weigh in favor of a real property classification and the other two factors weigh in favor of a personal property classification.
Ultimately, a lender is best off—and can likely avoid the need to ask these questions altogether—if it has a priority interest in both the real and personal property of a debtor. But in situations where this is not possible, there will be at least some uncertainty in most cases as to whether a grain bin is considered real or personal property.