Kang Haggerty News
by Daniel D. Haggerty, Esquire
In Zitney v. Appalachian Timber Products, Inc., decided July 3, 2103, the PA Superior Court considered a claim for damages by bona fide purchaser of real estate against the holder of an unrecorded timber contract, who commenced harvesting timber on the purchaser’s property after the purchaser entered into an agreement of sale to purchase the property.
Getting Lost in the Woods:
The PA Superior Court Decision Regarding Unrecorded Timber Contracts
Zitney v. Appalachian Timber Products, Inc., 2013 PA Super 167 (July 3, 2013)
In Zitney v. Appalachian Timber Products, Inc., decided July 3, 2103, the Superior Court of Pennsylvania considered a claim for damages by bona fide purchaser of real estate against the holder of an unrecorded timber contract, who commenced harvesting timber on the purchaser’s property after the purchaser entered into an agreement of sale to purchase the property.
The issue of unrecorded timber contracts can be the source of headaches for purchasers, lenders, and title companies. Unfortunately, instead of clarifying this area of law, the Superior Court included unnecessary and over-broad language in its opinion which conflicts with precedent and which will only invite uncertainty concerning the transfer of timbered property. The following analyzes how the Superior Court may have become lost in the woods.
The Facts
Carl and Yasmin Brown (the “Browns”) were the owners of certain timbered property in Fayette County, Pennsylvania (the “Property”). On August 8, 2000, the Browns entered into an agreement to have Appalachian Timber Products (“ATP”) harvest and remove timber from the Property. The timber contract required ATP to harvest certain timber within twenty-four months from the date the contract was executed.
Shortly after executing the timber contract, the Browns defaulted on their mortgage. Although not addressed in the opinion, the mortgage was apparently executed and recorded before the timber contract.
As a result of the Browns’ default, the Property was foreclosed upon, and the mortgagee bank received a deed to the Property which was recorded on February 20, 2001. Presumably the Property was sold at Sheriff’s Sale to the mortgagee bank, although this is not entirely clear from the opinion.
Thereafter, on September 11, 2001 the mortgagee bank sold the Property to Steve Zitney and Jeannine Marie Zitney (the “Zitneys”). The Zitneys recorded their deed on October 30, 2001.
On October 7, 2001, ATP commenced harvesting the timber on the property by way of its contractor John Appleby and Appleby Logging (“Appleby”). At the time the logging began the Zitneys had not yet recorded their deed. When they discovered the logging, the Zitneys immediately directed Appleby to cease all work.
The Zitneys also filed suit against ATP and Appleby averring that they were deprived of the value and use of the timber that had been removed from the Property and claiming that their Property had been damaged by the logging activities.
The parties filed summary judgment motions. In response, the trial court found that the contract governed the removal of timber and that, as a result of that contract, the Zitneys could not recover the value of the removed timber. The issue of whether Appleby’s harvesting caused damage to the Property proceeded to trial. The trial court found for the defendants and the Zitneys appealed.
On appeal, the Superior Court of Pennsylvania considered multiple questions. Important for our consideration was the Superior Court’s treatment of the Zitneys’ property rights vis-a-vis ATP’s timber rights.
Superior Court Holding
The Superior Court began its analysis with 42 Pa.C.S. § 8311, which provides: “a person who cuts or removes the timber of another person without the consent of that person shall be liable to that person in a civil action.” The Superior Court noted that a legally binding contract permitting the removal of timber would constitute consent for purposes of section 8311.
The Zitneys argued that the timber contract was a contract for the sale of land. As such, the Zitneys argued that, to be binding on subsequent bona fide purchasers, the contract must be considered a deed that must be recorded.
The Superior Court acknowledged, as a general matter, timber contracts may constitute sales for interest in land. The Superior Court pointed out that 21 P.S. § 521 provides:
It shall be lawful for the owner or owners of land, timber or bark, or for any person or persons having an interest therein, to grant, bargain and sell, or contract to sell, by deed, conveyance or contract in writing, signed by the grantor or grantors therein, and proved or acknowledged by them, as now required by law of this commonwealth for the signing and acknowledging of deeds, all or any right, title, claim or interest such grantor or grantors may have in or to any standing or growing timber, or the bark thereon, upon any lands in this commonwealth; and any such deed, conveyance or contract shall be taken and deemed as a deed, conveyance or contract conveying and vesting an interest in land.
21 P.S. § 521.
The Superior Court noted: “When a timber contract constitutes a contract for the sale of land, that contract, once recorded, serves as notice to a subsequent bona fide purchaser. 21 P.S. § 522.”
The Superior Court, however, pointed out that in both McLintock’s Appeal, 71 Pa. 365 (1872) and Havens v. Pearson, 334 Pa. 570, 6 A.2d 84 (1939), the Pennsylvania Supreme Court recognized that, despite the general categorization of 21 P.S. § 521, not all timber contracts constitute contracts for the sale of land.
In McLintock’s Appeal, the Supreme Court of Pennsylvania held: “In agreements for the reservation or sale of growing timber, whether the timber is to be regarded as personal property or an interest in real estate, depends on the nature of the contract and the intent of the parties.” Our Supreme Court explained:
If the agreement does not contemplate the immediate severance of the timber it is a contract for the sale or reservation of an interest in land, and until actual severance the timber in such cases passes to the heir, and not to the personal representative. But when the agreement is made with a view to the immediate severance of the timber from the soil, it is regarded as personal property, and passes to the executor and administrator, not the heir.
Id. at 366.
The Supreme Court further noted: “If the reservation had been of a perpetual right to enter on the land and cut all the pine and hemlock timber growing thereon, then it would be … regarded as an interest in land.” Id. at 366–67.
In Havens v. Pearson, the Supreme Court specifically stated:
Ordinarily a contract for the sale of standing timber to be cut and removed, or one that gives the purchaser discretion as to the time of removal, is a sale of land within the meaning of the Statute of Frauds. Where, however, timber is to be cut and [removed] by the purchaser within a definite or reasonable time, it becomes a question of the intent of the parties as to whether a sale of realty, the creation of a chattel real, or a sale of personalty was intended. It has been stated in many of our cases that the contract to be a sale of personalty must intend an ‘immediate severance’; it would be more accurate to say that the real test is, considering the nature and extent of the land, the number of feet of merchantable timber and the time given for removal, whether the vendor intended the vendee to have an interest in the standing timber as land, or whether he contemplated a removal within a time reasonably necessary therefor, in which case the vendee would have a chattel interest.
Id. at 86 (citations and footnote omitted; emphasis added).
In Zitney, the Superior Court also cited the following code provision in Pennsylvania’s Uniform Commercial Code:
A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (a) or of timber to be cut is a contract for the sale of goods within this pision whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.
13 Pa.C.S. § 2107(b). The Superior Court found that the Uniform Commercial Code generally treats contracts for the sale or removal of timber as contracts for the sale of goods, not as contracts for the sale of land.
The Superior Court noted, however, that subsection (c) of 13 Pa.C.S. § 2107 provides that a “contract for sale may be executed and recorded as a document transferring an interest in land and shall then constitute notice to third parties of the rights of the buyer under the contract for sale.” 13 Pa.C.S. § 2107(c) (emphasis added). Therefore, the Superior Court found that the Code aligns with the principles espoused in McLintock’s Appeal and Havens which is that courts “must consider the intent of the parties in order to ascertain the nature of the instant timber contract”.
In light of the foregoing, the Superior Court found that the timber contract between the Browns and ATP, which provided ATP twenty-four months to remove certain timber, created a contract for the sale of goods, not land. The Superior Court therefore held:
[W]e agree with the trial court’s conclusion that the timber contract in this case is a contract for the sale of goods. As such, the contract was not subject to any reporting provisions, including 21 P.S. § 522. The failure to record the contract does not exempt [Zitneys], even as bona fide subsequent purchasers, from the binding terms of the contract. Accordingly, we discern no error of law or abuse of discretion by the trial court in granting ATP and Appleby’s motions for summary judgment on this issue.
Zitney, supra, 2013 PA Super 167 (July 3, 2013).
Thus, the Superior Court in Zitney found, among other things, that the Zitneys could not bring a claim for damages against ATP and Appleby. The Superior Court found ATP was authorized to remove the timber from the Property under the terms of the timber agreement that was executed before the Zitneys took title.
Where the Superior Court Made a Wrong Turn
The problem with Superior Court’s decision Zitney is that it not only denied the Zitneys the right to seek damages, but also would have granted ATP the right to harvest timber on the Property under the terms of an unrecorded timber contract after title was transferred to the Zitneys. Specifically, the Court held:
“The failure to record the contract does not exempt [the Zitneys], even as bona fide subsequent purchasers, from the binding terms of the contract.”
2013 PA Super 167 (July 3, 2013) (emphasis added).
This language is unnecessarily overbroad, conflicts with Supreme Court precedent, creates uncertainty, and invites litigation. If we were to follow this holding to its illogical conclusion, than any unrecorded timber contract, for the sale of goods, would survive a sheriff’s sale of property and be binding upon the subsequent bona fide purchaser. In other words, not only would the subsequent purchaser be unable to seek damages caused by the removal of timber under such contract (as was the issue in Zitney), but according to Zitney, the subsequent purchaser would have to suffer having its property logged under the terms of the prior unrecorded timber contract. Imagine the problems such a holding would cause to purchasers, lenders, and title agents?
In reaching its decision, the Superior Court started down wrong path with its incorrect reading and misquoting of the Supreme Court of Pennsylvania’s decision in Havens.
In Havens, W.H. Pearson entered into a contract with A. J. Detwiler granting Pearson twenty years to cut and remove timber on 1,300 acres. O.S. Havens maintained a judgment lien on the property which predated the Pearson’s timber contract. Sometime after the timber contract was signed Havens purchased the property at Sheriff’s sale. Pearson continued to remove timber from the property after Havens took ownership of the property. Havens sought an injunction preventing Pearson from continuing to remove the timber which was granted by the trial court. The Supreme Court of Pennsylvania upheld the injunction.
In reaching its decision, the Supreme Court noted that Havens’s judgment lien fastened to the timber and was in effect when the timber contract was signed. The Supreme Court further found that the timber contract between W.H. Pearson and A. J. Detwiler was not for the sale of land, but rather was for the sale of personalty based on the intention of the parties.
In Havens, the issue was not whether the timber contract was for the sale of land or the sale of goods, but rather whether the timber contact, which was indisputably for the sale of goods, and which was junior to Havens’s judgment lien, created an absolute severance from the property as of the date of the contract. Pearson argued that the timber contract had the effect of severing the trees from the realty and convert them into personalty effective as of the date of the contract even though all or part remained standing on the land. The Supreme Court disagreed.
The Supreme Court held: “The standing timber was part of the freehold under the judgment, and though sold as personalty, it continued to be realty as to the judgment.” Havens, 334 Pa. at 575, 6 A.2d at 87 (emphasis added).
The Supreme Court pointed out why this was the case, stating:
The vendor could not, at his election, with the aid of a legal fiction, destroy the rights of the lien or remove the standing timber from the effect of the lien. As Justice Sharswood said in Foster’s Appeal, 74 Pa. 391, 398, 15 Am.Rep. 553: ‘Surely it will not be pretended that a man could by a mere declaration of record convert his land into personalty, so as to defeat the lien of mortgages, judgments and other encumbrances * * *.’ The timber remaining on the land at the time of the sheriff’s sale, passed to appellee as purchaser.
Id. 334 Pa. at 575-76, 6 A.2d at 87. The Havens Court, therefore held:
After the sheriff’s sale, the title to the standing timber passed to appellee Havens. The execution having been upon a judgment entered prior to the creation of the license to enter and cut the timber, appellee, as purchaser at the sheriff’s sale, could elect to terminate appellant’s rights. (citation omitted). [Havens] had the right to enjoin any further cutting of timber by appellant.
Id. 334 Pa. at 576, 6 A.2d at 88.
The Superior Court in Zitney simply misread Havens. The Superior Court in Zitney incorrectly claimed that the question in Havens was “whether the timber contract was for the sale of land or goods”. The Zitney Court further asserted that the Supreme Court in Havens had found that the timber contract between Pearson and A. J. Detwiler “was for a sale of land” and that this was why the Supreme Court upheld the injunction against Pearson. This was an incorrect reading of Havens. To the contrary, the Supreme Court in Havens found that the timber contract was “a sale of personalty”. The injunction was upheld not because the timber contract was for the sale of land (as claimed by the Superior Court in Zitney), but was because when Havens, a senior executing creditor, took title to the property, the timber remaining on the land at the time of the sheriff’s sale, passed to Havens.
The facts in Havens were virtually identical to Zitney. In Havens, the judgment creditor – Havens – maintained a judgment line on the property which predated Pearson’s timber contract. In Zitney the mortgagee bank maintained a mortgage lien on the Property which predated the timber contract. In both Zitney and Havens the senior lien holder foreclosed on the property taking title. Despite these similarities, the Zitney Court, by way of an obvious misreading of The Havens decision reached a different result.
The Havens Court made clear that Pearson’s rights under its unrecorded timber contact were immediately terminable by Havens – the executing senior creditor. In Zitney the Superior Court not only concluded that ATP’s rights were not terminable, but went so far as to find that they were enforceable against the Appellees – the bona fide purchases of the property.
Accordingly, it is clear that the Superior Court misapplied and misread Havens when it held that bona fide purchasers of property that has been washed through a sheriff sale should be bound by an unrecorded timber contract.
Parting Thoughts For Lenders
It can only be hoped that the Zitney opinion will be limited to its facts (i.e. precluding a claim for damages by a property owner against the holder of an unrecorded timber contract that harvest timbers after the property owner executes an agreement of sale). However, as this decision is of record, lenders should be prepared to take steps to ensure that property they receive through sheriff’s sale is not subject to unrecorded timber contracts. In this regard, the following steps should be considered.
First, before making a loan secured by timbered property, take steps to make sure property securing the loan is not subject to unrecorded timber contracts and include the appropriate representations, warranties, and covenants in the loan documents.
Second, make clear in the loan documents that removal of standing timber is not permitted or shall be subject to lender’s written approval.
Third, make sure that the standing timber is properly encumbered by both a mortgage and security agreement. Keep in mind that in order to perfect a security interest in standing timber, the financing statement (UCC-1) must be filed at the county level. In contrast, in order to maintain a security interest in cut timber (i.e. inventory), the financing statement must be recorded with the Secretary of State. Thus, financing statements should be filed at both the county and state level.
Fourth, during the foreclosure process attempt to determine, to the extent possible, if the debtor has entered into any unrecorded timber contracts.
Fifth, upon acquiring a property as sheriff’s sale, take steps to terminate all unrecorded timber contracts. The lender should provide immediate notice to the holders of any known timber contractors and may want to consider posting the property and/or publishing to notices in order to provide evidence of intent to terminate timber contracts.
Sixth, when transferring timbered REO property make sure that the agreements of sale and deed do not make representations or warranties regarding the existence of unrecorded timber contracts.
Seventh, finally, in order to enhance the value of the property and remove any doubt regarding unrecorded timber contracts, the lender may want to consider washing the standing timber and cut timber through a properly advertised and commercially reasonable Article 9 sale (after the lender takes possession of the collateral and satisfies its obligations under Pennsylvania’s Deficiency Judgment Act).