32 October 2007 ABI Journal

Written by:Joshua T. KleinFox Rothschild LLP; Philadelphiajklein@foxrothschild.com

The Bankruptcy Code1 recognizesthree types of liens: judicial,2

statutory3 and consensual.4 Re-cently, the Eighth Circuit BankruptcyAppellate Panel (BAP) issued an opinionregarding priorities between a lender witha valid consensual blanket lien on adebtor’s assets and a party asserting astate law statutory artisan’s lien.

In In re Borden, 361B.R. 489 (8th Cir.2007), the main issuebefore the BAP wasthe priority dispute,but in order todetermine the priori-ties among the partiesit initially had todetermine if a party’srights under a pos-

sessory lien are extinguished if thelienholder loses possession of the assetssubject to the lien and then regainspossession. This was an issue of firstimpression in the Eighth Circuit and inNebraska. The decision is instructivebecause it discusses the priority of statelaw possessory liens over prior securityinterests perfected under Article 9 of theUniform Commercial Code (UCC).

Interplay Between UCC Article9 Security Interests and StateLaw Possessory Liens

UCC §9-333, entitled “Priority ofCertain Liens Arising by Operation ofLaw,” provides as follows:

(a) [“Possessory lien.”] In thissection, “possessory lien” meansan interest, other than a securityinterest or an agricultural lien:

(1) which secures pay-ment or performance ofan obligation for servicesor materials furnishedwith respect to goods by aperson in the ordinarycourse of the person’sbusiness;

(2) which is created bystatute or rule of law infavor of the person; and(3) whose effectivenessdepends on the person’spossession of the goods.

(b) [Priority of possessory lien.]A possessory lien on goods haspriority over a security interest inthe goods unless the lien iscreated by a statute that expresslyprovides otherwise.5

Simply stated, a state law possessorylien may override an Article 9 securityinterest if it the requirements of §9-333.

Possessory liens arising under statelaw (statutory or common law) vary fromstate to state. However, severalcommonalities exist among most statelaw possessory liens. First, the propertythat is subject to the lien has to come intothe lienholder’s possession. Second, thelienholder is entitled to retain theproperty. Third, there typically is someenhancement in the value of the propertysubject to the lien. Common types of statelaw possessory liens include ware-houseman liens, common carrier liens,artisan liens and mechanics’ liens.6

The Decision: BackgroundOn June 25, 2002, Michael Borden

(debtor), a farmer, and his wife borrowedcertain funds from Genoa National Bank(lender) and in return granted the lendera blanket security interest on all of theirpersonal property, including machinery

and equipment then owned and thereafteracquired. The lender filed a UCCfinancing statement with the NebraskaSecretary of State on June 26, 2002,perfecting its blanket security interest.

In late 2004, the debtor took a tractorand another piece of farming equipment(collectively, the equipment) to Bellamy’sInc. (artisan) for repairs. The artisancompleted the necessary repairs andultimately billed the debtor $5,092.80 forthe work performed on the equipment.The debtor had insufficient funds to payfor the repairs, so the artisan refused torelease the equipment and it remained inthe artisan’s possession under theNebraska artisan lien statute.7

On April 1, 2005 (the petition date),the debtor and his wife filed a jointvoluntary petition for relief under chapter12 of the Code. As of the petition date,the equipment remained in the artisan’spossession. However, in June 2005, thedebtor entered the artisan’s lot, took the

tractor without the artisan’s permission,drove it to his farm and used it inconnection with his farming operations.Obviously, the artisan noticed themissing tractor and contacted the debtorto see if he had taken it from the lot. Thedebtor admitted that he had taken thetractor because he needed it for hisfarming operations, but advised that hewould return the tractor to the artisan assoon as he finished using it. Eventually,the tractor broke down again and wasreturned by the debtor to the artisan inthe fall of 2005.

In September 2005, the debtor tookthe other piece of equipment from theartisan’s lot without permission. Onceagain, the artisan contacted the debtorconcerning the missing piece ofequipment, and again, the debtor admittedtaking the piece of equipment but claimedhe would return it sometime in November2005. In April 2006, the lender filed amotion to determine the priority of therespective liens asserted by the lender andthe artisan in the equipment.

Priority of State Law Possessory Liens overPerfected Security Interests: In re Borden

About the Author

Joshua Klein is an attorney with the lawfirm of Fox Rothschild LLP in itsFinancial Restructuring and BankruptcyDepartment, where he representscorporate debtors and creditors in avariety of financial restructurings,bankruptcy proceedings andcommercial workouts.

Lien on Me

1 Title 11 of the U.S. Code, 11 U.S.C. §§101 et seq.

2 11 U.S.C. §101(36).

3 11 U.S.C. §101(53).

4 11 U.S.C. §101(51); In re Schick, 418 F.3d 321, 323 (3d Cir. 2005).continued on page 70

Joshua T. Klein

5 UCC §9-333 (former §9-310).

6 Used here, “mechanics’ lien” means a lien for work performed on a

vehicle or piece of equipment. This should not to be confused with

nonpossessory state law mechanics’ liens that that provide a contractor

or sub-contractor with a lien that usually includes specific filing

requirements in order to perfect and enforce the mechanics’ lien.

7 Neb. Rev. Stat. §52-201 (providing for artisan’s lien with priority over

other prior perfected security interests in the same collateral).

70 October 2007 ABI Journal

Lien on Me: Priority of State Law Possessory Liensfrom page 32

Bankruptcy Court DecisionThe bankruptcy court determined that

there was no controlling law in Nebraskagoverning the facts before it—competingliens where an artisan loses possession ofthe property through action of theproperty owner. The court looked to otherjurisdictions for guidance and discoveredthat other courts faced with the issue hadreached conflicting results. Ultimately,the bankruptcy court determined that thelender’s security interest in the equipmenthad priority over the artisan’s lien in theequipment. The bankruptcy courtconcluded that continuous possession isrequired to maintain an artisan’s lien. Thecourt reasoned that in the alternative, evenif continuous possession were notrequired, the automatic stay under Code§362 prevented the artisan from regainingpossession of the equipment post-petition.Accordingly, the artisan could not havehad a possessory artisan’s lien on theequipment. The artisan then filed amotion to reconsider. The bankruptcycourt denied the motion. The artisanappealed to the BAP.

BAP DecisionThe BAP first discussed artisan’s liens

and the applicable priority provisions ofthe Nebraska UCC. In Nebraska, anyperson who repairs vehicles, machineryor farm implement enjoys a lien on suchequipment while in his or her possessionuntil the owner pays the repair charges.8

Nebraska recognizes the priority of apossessory lien over other securityinterests if the provisions of §9-333 arefulfilled.9 The BAP determined that theartisan’s lien statute met the requirementsof §9-333 and that, consequently, anartisan’s lien has priority over apreviously perfected security interest inthe same property.10

Therefore, the BAP was faced withthe task of deciding whether the artisanhad a valid artisan’s lien under Nebraskalaw, because if so, it would have priorityover the lender’s liens under §9-333. Inorder to do so, the issue became whetherthe artisan had a valid possessory lienunder the circumstances of the case (i.e.,where it involuntarily lost but laterregained possession of the equipment

without court authority following thepetition date). The issue was one of firstimpression under Nebraska law and in theEighth Circuit.

The BAP began its analysis with adiscussion of how other jurisdictions haveaddressed the circumstances where anartisan loses possession of the propertyand asserted a lien either: (1) without everregaining possession or (2) after regainingpossession. The principles the BAP culledfrom the decisions of other courts aresummarized as follows:11

1. Possession is generally required fora possessory lien.12

2. An artisan no longer has apossessory lien with priority over pre-existing security interests if the artisansurrenders possession of the prop-erty.13

3. Some courts have upheld an artisanlien after return of possession to theowner; however, such a lien does nothave priority over pre-existingsecurity interests.14

4. Other courts treat the lien as beingin a state of suspended animationupon release of the goods, and theartisan cannot enforce the lien whileit is in such state. If the artisanlawfully regains possession, theartisan can once again enforce a lienin the property.15

5. When an artisan loses possessioninvoluntarily, the artisan does notnecessarily lose the artisan’s lien.16

6. A conditional release of the goodsdoes not necessarily defeat anartisan’s lien, usually with respect ofholders of pre-existing securityinterests who are not impaired by therelease.17

7. An artisan’s lien lost whenpossession is lost is revived uponrepossession of the property. In sucha situation, the priority over pre-existing security interests is retainedbut it is subordinate to a bona fidepurchaser.18

The BAP concluded that the artisandid not lose its artisan’s lien on the

equipment when the debtor took theequipment without the knowledge orconsent of the artisan. The BAP was notpersuaded that the artisan’s failure toproceed with any action to recoverpossession of the equipment could beafter-the-fact consent by the artisan.Instead, the BAP concluded that, even ifit was considered consent, it wasconditional consent that provided for thereturn of the equipment to the artisanupon the debtor’s completion of its use,and such conditional consent to a priortaking of the property did not defeat theartisan’s lien.19

In support of its conclusion, the BAPnext addressed several points concerningthe policy underlying the creation andpriority of security interests and ofartisan’s liens. First, the BAP noted thatthe purpose of perfecting a securityinterest is to put the world on notice ofsuch security interest, which may occurin one of three ways: (1) registration withthe appropriate government agency, (2)notation on certificate of title or (3)possession by the lienholder.20 Artisanliens, such as the one at issue, areperfected by the artisan retainingpossession of the property upon which itperformed work, repairs or other services.A third party is on notice of the artisan’ssecurity interest in the property becausethe artisan retains possession; if the thirdparty chooses to enter into a transactionconcerning the property with the propertyowner, it does so at its own peril.21

In addition, the notice of lien permitsholders of competing security interestsin the same collateral to determine thepriority among the parties with respectto their security interests.22 The generalrule concerning recorded interests is thatfirst in time has priority, but there areexceptions to that rule, such as isprovided by UCC §9-333. For artisan’sliens, the BAP looked to the purposebehind the priority given to possessoryliens such as artisan’s liens. First, the“[c]ourts and legislatures generallyrecognize that a party who provideslabor and materials to property enhancesthe value of the property.”23 Thus, the

8 See Borden, 361 B.R. at 493; Neb. Rev. Stat. §52-201.

9 See Borden, 361 B.R. at 493; Neb. Rev. Stat. UCC §9-333 (former

§9-310).

10 See Borden, 361 B.R. at 493.

11 Id. at 494.

12 See, e.g., Mack Fin. Corp. v. Pterbilt of Chattangooga Inc. (In re Glenn),

20 B.R. 98, 99-100 (Bankr. E.D. Tenn. 1982).

13 See Yellow Mfg. Acceptance Corp. v. Bristol, 193 Or. 24, 236 P.2d 939,

946 (1951).

14 See, e.g., Forrest Cate Ford Inc. v. Fryar, 62 Tenn.App. 572, 465 S.W.2d

882, 883-84 (1970).

15 See Godon v. Sullivan, 188 F.2d 980, 981-82 (D.C. Cir. 1951).

16 See e.g., Smith v. Cooper Chevrolet Inc., 404 So.2d 49, 51 (Ala. 1981).

17 Id.

18 See M&I W. State Bank v. Wilson, 172 Wis. 2d 357, 493 N.W.2d 387,

390 (1992).

19 Id.

20 See Borden, 361 B.R. at 495.

21 Id.

22 Id.

ABI Journal October 2007 71

court reasoned, the party providing suchan enhancement to property should bepaid for such services, and if not paid,then it should retain the property untilreceipt of payment.24 For this reason, theBAP determined that the Nebraskaartisan lien statute provided for such anoutcome and served the equitablepurpose of assisting materialmen andlaborers to obtain payment for theirservices that enhance the value of theproperty upon which they haveperformed such services.25

The BAP highlighted the issueregarding the priority of artisan liensover prior perfected security interestsprovided by UCC §9-333. The courtnoted that repair or maintenanceperformed by an artisan is actually in thebest interests of a prior secured lenderbecause collateral is clearly worth lesswhen in a state of disrepair. In otherwords, maintenance benefits the securedlender because it prevents a decline inthe lender’s collateral package. Withregard to the specific facts in this case,the BAP found that the artisan’s repairsto the equipment did in fact enhance thevalue of the equipment, with suchenhancement increasing the value of thelender’s collateral.26 Therefore, “[r]ecog-nizing the superpriority of the artisan’slien over the lender’s security interest isconsistent with the policy underlyingartisan lien law.”27

The final arguments put forth by thelender and relied upon by the bankruptcycourt were then dismissed by the BAP.The first of these arguments was thatcontinuous possession is strictly requiredto maintain a priority artisan’s lien. TheBAP determined that the cases relied onby the bankruptcy court did not involvethe same set of facts concerning theunauthorized taking by the debtor.28

Second, the BAP concluded thatrecognition of the artisan’s lien and itspriority over the lender’s security interestdid not give the artisan control over thepriorities of the Code. In fact, the BAPfound that by its decision, the bankruptcycourt actually permitted the debtor todictate the priorities between the artisanand the lender by “permitting the debtor’swrongful taking of the equipment to

determine the outcome of the prioritydispute at trial level.”29

Finally, the BAP addressed thebankruptcy court’s determination that theautomatic stay provisions of Code §362prevented the artisan from gainingpossession of the equipment or fromperfecting a lien after the petition date. TheBAP agreed that while this was technicallytrue, the analysis should not end with thatconclusion. Rather, the BAP looked at thefacts and the Code provisions concerningclaims against a bankruptcy estate.Specifically, under Code §502(b) thepetition date in a case controls theallowance of claims in bankruptcy.30

Because the artisan had possession of theequipment as of the petition date, it had aclaim secured by an artisan’s lien in thedebtor’s bankruptcy case with priority overthe lender’s secured claim under NebraskaUCC §9-333.31

On the surface, it appears that the

BAP has created a bright-line rule

with respect to possessory liens

where possession is lost without the

consent of the lienholder, and is then

regained.

Accordingly, the artisan’s lien on theequipment has priority over the lender’ssecurity interest in the same equipment.32

Furthermore, the BAP thought that it was“fundamentally unfair to punish the artisanfor a technical violation of the automaticstay which occurred as a result of thedebtor’s actions, not the artisan’s actions.”33

The BAP noted that the debtor had amechanism to attempt to obtain turnoverof the equipment through Code §542, butthat the debtor chose not use it and tookthe equipment without any authority.

The DissentOne member of the BAP dissented.

The dissenting justice stated that in theabsence of any authority from the

Nebraska Supreme Court, the BAP mustinterpret the statute before it by giving itits plain and ordinary meaning.34 Thedissenting justice felt that the majorityadded to the Neb. Rev. Stat. §52-201 “aconcept of continued perfection, notwith-standing loss of possession” that simplywas not in the statute, and by doing soengaged in a legislative function.35

Therefore, the dissenting judge’s positionwas that the Nebraska statute“unequivocally provides for a first-priority possessory lien only untilpossession is lost.”36

Furthermore, the dissenting judgeagreed that the result reached by themajority was fair, but it envisionedsituations where the BAP’s ruling couldlead to unfairness for certain parties. Forexample a bona fide purchaser ofequipment subject to an artisan’s lien, butnot in the lienholder’s possession, wouldhave no notice of the security interest inthe equipment.37 Under the majority’sholding, the dissenting judge thought thatthis situation would result in a bona fidepurchaser unknowingly buying equip-ment subject to the artisan’s lien, whichis also unfair. The dissenting justicebelieved that the balancing of issues suchas these and their solutions is best left tothe legislature.38

ConclusionOn the surface, it appears that the

BAP has created a bright-line rule withrespect to possessory liens wherepossession is lost without the consent ofthe lienholder, and is then regained.However, throughout the decision, thefact that the debtor took the equipmentfrom the artisan without authority to doso is a very strong theme and appears tobe an underlying basis for the BAP’sgeneral holding and the defeat of mostof the lender’s arguments, includingpermitting a “technical” stay violation.Therefore the line created might notactually be as bright as it seems.Nevertheless, the decision provides agood discussion of the issues that arisein a priority disputes between Article 9security interests and state lawpossessory liens. It will be interesting tosee how courts in other circuits deal withthe issues presented in Borden goingforward and whether they create abright-line approach, defer to thelegislature or deal with the issue on acase-by-case basis. ■

23 Id.

24 Id. (citing Gen. Motors Acceptance Corp. v. Colwell Diesel Serv. &

Garage Inc., 302 A.2d at 596-97).

25 See Borden, 361 B.R. at 495-6.

26 Id. at 496.

27 Id.

28 Id. The bankruptcy court relied on In re Glenn for its support that loss of

possession destroys the artisan lien. However, as the BAP pointed out,

even the Glenn court “expressly acknowledged that wrongfully

obtaining possession of the property subject to the lien dispute might

change the result.” Id.

29 See Borden, 361 B.R. at 497.

30 See Borden, 361 B.R. at 497; 11 U.S.C. §502(b).

31 Id.

32 Id.

33 Id. This “fairness” point by the BAP also included mention of the benefit

to the lender that flowed from the debtor’s use of the equipment, which

permitted crops to be harvested that produced funds to pay the lender’s

claim. Id.

34 See Borden, 361 B.R. at 498; Ferguson v. Union Pac. R.R., 258 Neb. 78,

601 N.W.2d 907 (1999).

35 See Borden, 361 B.R. at 498.

36 Id. at 499.

37 Id.

38 Id.at 498.

Copyright 2007 American Bankruptcy Institute. Please contact ABI at (703) 739-0800 for reprint permission.