Reference no: EM133262492

You are a lawyer representing a bank that, 10 years ago, loaned $10,000,000 to a then-new local business that intended to manufacture drilling rig derricks for use in onshore oil & gas exploration ("RigBuilders"). The purpose of the loan was to allow RigBuilders to buy a piece of undeveloped land ideal for their manufacturing operations (they needed a lot of room as many different kinds of large-scale parts and manufacturing operations were required and drilling rig derricks, once assembled, are quite large). The loan was made with the land put up as collateral securing repayment of the mortgage. The loan documents were typical for commercial real estate transactions of this type and all required filings were made, so from your perspective the loan and the first mortgage lien look to be good and tight.

RigBuilders first erected a large manufacturing building on the land with a thick raised concrete slab foundation capable of bearing great weight. The building was framed with massive steel girders anchored deep within the foundation and was covered with corrugated steel sheets. At the top of the building's high sidewalls parallel steel rails ran the length of the building, and on those rails an overhead electric crane custom-made for the exact dimensions of the building was installed that was capable of moving heavy iron and steel components to or from any spot on the floor. Fifteen pieces of specialized manufacturing machinery were placed on the floor in specific sequential locations so that the building housed a large assembly line on which drilling rig derricks could be built from scratch, with raw materials entering one end of the building and components then being moved from station to station until a completed derrick exited the building at the other end. Eight of the manufacturing machines on the floor were large and heavy, were fastened to the floor with cement and large steel bolts with welded nuts, and were directly connected to the building's electrical power and plumbing systems. The other seven manufacturing machines also were large and heavy and sat on electrically-driven steel wheels running on short steel rails embedded in the floor so as to allow some movement, did not need to be connected to the building's plumbing systems, and were connected to the building's electrical power system by means of heavy-gauge plug-in electrical cables.

Since the loan was made, a worldwide oil price bust has occurred that has caused energy companies to cease most onshore drilling operations in the US., and as a result RigBuilders' business is failing and they have defaulted on the bank mortgage loan. You were sent out to assess the collateral and realized that, in addition to the real estate, there now is a valuable building with valuable machinery inside, plus valuable inventories of both parts and partially (some mostly) completed drilling rig derricks, and that all of the land, the building, the machinery and the inventories could possibly be sold for a total amount sufficient to pay off the remaining loan balance. However, RigBuilders and their other creditors (there are quite a few) have contended that your bank only has collateral rights in the land and does not have any rights in the building or in any machinery or inventories contained in the building or stored on the property. RigBuilders has filed bankruptcy and is working to reorganize under Chapter 11 and save as much of their business as possible (they think they can go forward building steel derricks for large cranes using their existing facility), so this dispute will have to be resolved through litigation in the bankruptcy court.

What are your views, with explanation, on:

1) Whether the bank has priority as to the land;

2) Whether the bank has priority as to the building;

3) Whether the bank has priority as to the eight machines on the floor of the building that cannot move;

4) Whether the bank has priority as to the seven machines on the floor of the building that can move;

5) Whether the bank has priority as to the overhead crane; and

6) Whether the bank has priority as to any of the inventories of parts or partially completed drilling rig derricks?