The UCC Did Not Displace South Carolina's Common Law Rule Regarding Standing Timber: Epstein v. Coastal Timber Co.

The UCC Did Not Displace South Carolina's Common Law Rule Regarding Standing Timber: Epstein v. Coastal Timber Co.

CASE OVERVIEW

According to South Carolina law, a mortgage on real property includes the standing timber unless the mortgage excepts it. The Uniform Commercial Code has not displaced this common law rule. Specifically, Section 2-107(2) does not transform all standing timber from realty into "goods." It does not require a mortgagee to comply with Article 9 to create and perfect a security interest in standing timber. Rather, the recorded mortgage is sufficient. Section 2-107(2) simply establishes that Article 2, not real estate law, governs contracts to sell standing timber. Therefore, in Epstein v. Coastal Timber Co., 393 S.C. 276, 711 S.E.2d 912, 75 U.C.C. Rep. Serv. 2d 85 (2011) [an enhanced version of this opinion is available to lexis.com subscribers], a contract to sell standing timber did not divest the prior recorded real estate mortgagee of its interest in the standing timber. The mortgagee's mortgage gave him an interest in the standing timber. That mortgage did not need to meet the requirements of an Article 9 financing statement. Accordingly, the timber company's interest was subordinate to that of the mortgagee.

 The annotation of Epstein v. Coastal Timber Co. is provided below by the Uniform Commercial Code Reporter-Digest.

CASE ANNOTATION

Historically, South Carolina has characterized standing timber as a part of the realty as much as the soil itself. According to established South Carolina law, a mortgage on real property includes the standing timber unless the mortgage, expressly or by implication, excepts it. South Carolina's 1988 amendments to the Code do not displace this common law rule. Specifically, Section 2-107(2) of the Uniform Commercial Code does not transform standing timber into goods such that a contract to sell standing timber divests a prior recorded real estate mortgagee of its interest in the standing timber. In fact, the Code and the common law work in harmony.

Section 2-107 describes when Article 2 governs "goods to be severed from realty." Section 2-107(1) states the general rule: "[a] contract for the sale of minerals or the like . . . is a contract for the sale of goods within this Article if they are to be severed by the seller but until severance a purported present sale thereof . . . is effective only as a contract to sell." (Emphasis added.) Section 2-107(2), as amended in 1988, states a special rule for timber to be cut. Parties, by identifying the timber, can effect a present sale under Article 2 even though the timber is part of the realty. Section 2-107(2) states: "[a] contract for the sale . . . of timber to be cut is a contract for the sale of goods within this Article . . . even though it forms part of the realty at the time of contacting, and the parties can by identification effect a present sale before severance." The South Carolina Reporter's Comments note that several timber-growing states had changed the text of the Code to make timber to be cut "goods." South Carolina followed suit in 1988. Characterizing timber to be cut as goods facilitates financing for timber transactions. The Comments go on to note that those with an interest in timber to be cut must give notice in the real estate records to protect persons dealing with timberlands.

Section 2-107(2) is not displacing the common law. It is not saying standing timber is now goods. It is not divesting a prior real estate mortgagee of its interest in the timber. Moreover, it is not saying a real estate mortgagee must comply with Article 9 to create and perfect a security interest in standing timber. It is simply establishing that Article 2, not the common law of real estate, governs contracts to sell standing timber.

The 1988 amendments to Section 2-107(2) treat standing timber as goods for purposes of a contract for sale. Generally, Article 2 does not apply to the sale of minerals or the like to be removed from realty, but not yet severed. Local real estate law controls. Section 2-107(2) establishes that Article 2 does apply to timber to be severed from realty. Contracts regarding timber to be cut are contracts for sale, subject to Article 2, and not contracts to sell, subject to local real estate law.

The 1988 amendments do not cancel the effect of a prior recorded mortgage or lien on standing timber. A subsequently recorded interest in standing timber under a contract for sale is junior to a prior recorded mortgage on the real estate. To hold otherwise would allow a mortgagor to unilaterally void an existing, properly recorded lien on the real property and its standing timber by simply executing a contract to sell the timber.

Section 2-107(3) supports this interpretation. It says the "provisions of this section are subject to any third party rights provided by the law relating to realty records." Section 2-107(3) recognizes the Code's need to harmonize its rules with existing real estate law, and with interests properly recorded in the real estate records. Therefore, a real estate mortgagee's recorded mortgage is sufficient to create and perfect an interest in standing timber. A real estate mortgagee is not required to comply with Article 9. Those requirements are relevant only to those seeking to protect their interest in timber to be cut under a contract for sale. They must treat the standing timber as goods.

The lower court misconstrued the 1988 amendments. The amendments did not effect a wholesale cancellation of existing real estate law in South Carolina. Section 2-107(2) does not convert all standing timber to "goods." Therefore, the lower court erred in granting summary judgment to a timber company when: 1) Epstein properly recorded a mortgage on real estate on June 1, 2006; 2) on June 6, 2006, the owner-mortgagor of the real estate executed a "Timber Title," conveying all merchantable timber located on the mortgaged property to the timber company; 3) on June 12, 2006, the timber company recorded the "Timber Title" in the real estate records pursuant to Article 9; 4) the timber company thereafter cut and removed the timber, and paid the mortgagor $115,000; 5) Epstein learned of the timber removal when he began foreclosure proceedings against the mortgagor; and 6) Epstein sued the timber company for the value of the timber removed and the decreased value of the land. Epstein's interest in the standing timber was not subject to Article 9. It was subject to South Carolina real estate law. According to South Carolina real estate law, Epstein's mortgage gave him an interest in the standing timber. Epstein's recorded mortgage did not need to meet the requirements of an Article 9 financing statement. Epstein did not need to file a financing statement in the real estate records stating that his collateral covered timber to be cut. Epstein's interest in the standing timber vested before the timber company's contract to buy. Therefore, the timber company's interest was subordinate to that of Epstein. Accordingly, the case was reversed and remanded for further proceedings.

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