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Issues and Information for Today’s Busy Insolvency Professional
When the Warehouse and Secured Lender Battle,
Don’t Forget about the Common-Law Storage Lien
Written by:
Kevin C. Driscoll Jr.
Barnes & Thornburg LLP; Chicago
kevin.driscoll@btlaw.com
I
magine the following scenario:
Customer stores goods with a
warehouseman. While the goods are
in the possession of the warehouseman,
the customer goes out of business. The
warehouseman, unpaid, attempts to sell
the goods to pay its unpaid storage
charges, but finds that the customer’s
secured lender claims a superior interest
in the goods by virtue of a security
interest properly perfected before the
goods were placed in
the warehouseman’s
possession.
As
discussed below, case
law usually, but not
always, finds that a
warehouseman’s lien
granted by the
Uniform Commercial
Code (UCC) is
Kevin C. Driscoll Jr.
subordinate to the
interest of a previously perfected secured
creditor.
Nonetheless,
if
our
warehouseman finds its UCC lien
subordinated, state statute or common law
may provide an avenue to prime the
secured creditor. Given the Bankruptcy
Abuse Prevention and Consumer
Protection Act of 2005’s (BAPCPA’s)
greatly enhanced protection of
warehousemen’s liens, the priority of
these liens is of utmost importance.1
The Warehouseman’s UCC Lien
Under §7-209 of the UCC, a warehouseman has a lien against the bailor on the
goods in the warehouseman’s possession
for unpaid storage and transportation
charges. At bare minimum, this lien is a
1 11 U.S.C. §546(i) (stating that “the trustee may not avoid a
warehousemen’s lien”).
About the Author
Kevin Driscoll, an associate of Barnes &
Thornburg LLP, represents secured and
unsecured creditors in bankruptcy
proceedings and has defended and
prosecuted dozens of preference
actions, including cases seeking in
excess of $1 million.
“specific” lien attaching to the goods held
by the warehouseman, but depending on
the wording of the receipt or storage
agreement, it can expand to a “general”
lien covering “like charges in relation to
other goods.”2 Thus, our warehouseman
finds itself in the enviable position of
having a lien on the goods to help defray
the unpaid storage charges. However, the
In our scenario, our warehouseman
has asserted a lien under the UCC, so the
lien derives from statute. But §7-209(c) of
the UCC has the “provides otherwise”
language, which may trigger subordination of the warehouse lien since a lien
is only “effective against any person that
so entrusted the bailor with possession of
the goods that a pledge of them by the
bailor to a good-faith purchaser for value
would have been valid.” UCC §7-209(c).
Thus, our warehouseman’s lien is not
effective as against the secured party
unless the circumstances surrounding
deposit of the goods to the warehouseman
was such that “a pledge by the [customer]
to a good-faith purchaser for value would
have been valid.”5 Likewise, our
warehouseman’s lien is not effective
Lien on Me
lien is possessory, and the warehouseman
loses his lien on any goods he voluntarily
delivers. UCC §7-209(e). Likewise, an
unjustifiable refusal to deliver the goods
may result in loss of the lien. Id.
But what is the priority of the
warehouseman’s lien in relation to the
secured lender’s lien? Under §9-333 of
Revised Article 93 (RA9), the warehouseman’s lien, being possessory, has
“priority over a security interest in the
goods unless the lien is created by a
statute that expressly provides otherwise.”
In other words, RA9 provides that if the
possessory lien derives from common
law, or derives from a statute that is silent
as to the lien’s subordination to existing
security interests, then the possessory lien
has priority over a previously perfected
security interest.4
2 See Official Comment 1 to Model Version of UCC §7-209.
3 Formerly UCC §9-310.
4 See Official Comment 2 to Model Version of UCC §9-333.
against a security interest held by the
secured lender unless the secured lender
so entrusted the customer with possession
of the goods that a pledge of the goods by
the customer would have given a
“hypothetical bona fide pledgee” priority
over the secured lender. Official Comment
3 to UCC §7-209.
Cases Finding
Warehouseman’s UCC Lien
Subordinated to Prior
Perfected Security Interest
K Furniture Co. v. Sanders Transfer
& Storage Co., 532 S.W.2d 910 (Tenn.
1975), nicely illustrates the use of the
hypothetical “good-faith purchaser” or
“bona fide pledgee” doctrines to
subordinate a warehouseman’s lien to that
of a previously perfected secured lender.
5 Official Comment 3 to UCC §7-209. Factors to consider include the
“actual, implied or apparent authority of the depositor.” Reference is
also made to UCC §§7-503 and 9-322 of RA9.
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In this case, a consumer purchased
household furniture on credit, granting
the seller a valid purchase money security
interest (PMSI). The furniture was then
placed in storage by the customer’s wife.
The customer defaulted on the payment,
and the secured lender sought to recover
the furniture. The warehouse asserted its
lien rights under §7-209 of the UCC. In
holding for the secured lender, the K
Furniture court noted that there was
nothing in the record to indicate that the
secured lender had “delivered or entrusted
the furniture to [the customer’s wife] with
the actual or apparent authority to store
the furniture....”6 As such, the security
interest of the secured lender took priority
over the warehouseman’s lien. Notably,
the court makes no mention of whether
its holding would have been impacted if
the customer, as opposed to his wife,
placed the furniture in storage.7
In re Siena Publishers Associates, 149
B.R. 359 (Bankr. S.D.N.Y. 1993), reached
a similar conclusion. In this case, the
debtor, a book wholesaler, outsourced its
order fulfillment and warehousing
services to MSI. The debtor’s assets were
sold in bankruptcy, with any liens to
attach to proceeds of the sale. The
debtor’s secured lender perfected its
security interest in the debtor’s assets
prior to MSI’s warehouse lien. The court
found that though MSI retained
possession of the inventory, its warehouse
lien was subordinated to the bank’s
security interest because “the debtor
could not validly pledge its inventory to
a bona fide pledgee for value because the
bank possessed a validly perfected
security interest in all of the debtor’s
assets, including its inventory.” In re
Siena Publishers, 149 B.R. at 364.8
Cases Finding
Warehouseman’s UCC Lien
Not Subordinated to Prior
Perfected Security Interest
In re Sharon Steel Corp., 176 B.R. 384
6 K Furniture Co., 532 S.W.2d at 912.
7 The model version of UCC §7-209 has a subsection (d) providing that a
warehouseman’s lien on “household goods” is effective “against all
persons.” Thus, under this provision, a warehouseman’s lien on
household goods should defeat a previously perfected secured creditor.
Not all jurisdictions have adopted this provision, though.
8 The Supreme Court of Idaho reached a similar decision in Curry Grain
Storage Inc. v. Heston Corp., 815 P.2d 1068, 1071 (Idaho 1991), in
which the lien of warehouseman holding seed for a customer was
subordinated to that of the customer’s secured lender since the secured
lender had not “so entrusted [customer] with possession of the seed
that a pledge of the seed by [customer] to a good-faith purchaser for
value would have been valid.” After that decision, the Idaho legislature
enacted a parallel provision to 7-209, Idaho Code §28-7-209A, which
allowed warehouseman liens for “agricultural commodities” to have
priority over a previously perfected security interest. See AG Services of
America Inc. v. Kechter, 44 P.2d 1117, 1121-22 (Idaho 2002). However,
§28-7-209A of the Idaho Code was recently repealed.
(Bankr. W.D. Pa. 1995), presents a
bankruptcy court determining that a security
interest held by a secured lender in certain
of the debtor’s inventory was subordinate
to later arising liens in the same inventory
held by multiple warehousing companies.
In analyzing the priority of the
warehouseman’s liens against the secured
lender’s security interest, the Sharon court
agreed that “[w]here the third party is the
holder of a security interest, the rights of the
warehousemen depend on the priority given
to a hypothetical bona fide pledgee....”
Sharon Steel Corp., 176 B.R. at 387-88.
However, the Sharon court found for the
warehousemen. Importantly, the court noted
that “under the loan documentation, the
debtor was permitted to incur warehouseman’s...liens in the ordinary course of
business, and that such liens were ‘permitted
liens’ under the security agreement.” See Id.
at 388. The court then noted:
By permitting the debtor to store
inventory [with the warehousemen] and permitting the debtor to
incur warehouseman’s...liens in the
ordinary course of business, [the
secured lender] effectively permitted the debtor to transfer its
inventory to the pledgees [the
warehousemen] as security for the
[debtor’s] payment of the warehouseman’s...liens.
Accordingly, the court held that the prior
perfected security interest of the secured
lender was subordinate to the liens held
by the warehousemen. Thus, our warehouseman would be advised to analyze
the security agreement and other loan
documents between the secured lender
and the customer to determine if these
documents create an argument that the
secured lender has clothed the customer
with sufficient authority to meet the
hypothetical “good-faith purchaser” or
“bona fide pledgee” requirements.
A Prior Perfected Security
Interest May Be Subordinate
to Possessory Storage Liens
Under State Statute and/or
Common Law
As shown, the party claiming a UCC
warehouse lien may find itself with a valid
lien claim, but one that is subordinated to
a previously perfected security interest.
However, even though the UCC lien may
be subordinated to that of the secured
lender, a common-law possessory lien
would not be subordinate. Recall that
under RA9-333, a possessory lien has
“priority over a security interest in the
goods unless the lien is created by a statute
that expressly provides otherwise.”
Common-law liens, not being based on
statute, would not trigger subordination
under RA9-333. Likewise, a non-UCC
possessory storage lien created by a statute
that did not expressly provide for
subordination to a security interest should
likewise defeat subordination.
Use of common-law principles by a
warehouseman to prime a secured lender
is shown by the recent case of Charter One
Auto Finance v. Inkas Coffee Distributors
Realty, 57 UCC Rep.Serv.2d 672, 39 Conn.
L. Rptr. 110 (Conn. Super. Ct. 2005). In this
case, the secured lender held a PMSI in an
automobile. The automobile’s owner stored
the vehicle in a parking lot located in the
state of Connecticut. The customer
defaulted on its loan obligations, and the
secured lender demanded possession of the
automobile from the parking lot. The
parking lot refused to release the vehicle
until its storage fees were paid. The secured
lender sued the parking lot in replevin. The
parking lot counterclaimed, arguing that its
common-law and statutory-lien rights
(including a §7-209 lien) were superior to
the secured lender’s claim.
In ruling for the parking lot, the court
noted that Connecticut law recognized a
common-law possessory lien for storage.9
As such,
This possessory lien is not
premised on a statute; accordingly,
the “unless” part of §9-310’s
[RA9-333] rule is inapplicable.
Also, the court is unaware of a
statute which expressly provides
that a perfected security interest
has priority over such a common
law possessory lien....
Since the parking lot prevailed on its
common-law lien, the court did not
address the portions of the counterclaim
brought under UCC §7-209. See, also,
Nat’l. Bank of Joliet v. Bergeron Cadillac
9 Not all states recognize a common-law possessory lien for storage. See,
e.g., Jewett v. City Transfer & Storage Co., 18 P.2d 351 (Cal. Dist. Ct.
App. 1933) (stating at common law, warehouseman had specific lien for
proper storage charges); Pennsylvania Indus. Finance Ass’n. v. Thomas,
18 Pa. D. & C. 367 (Pa. Com. Pl. 1933) (warehouseman has commonlaw right of lien for storage charges on goods in his possession); Reebie
v. Brackett, 109 Ill. App. 631 (Ill. App. Ct. 1903) (warehousemen at
common law had lien upon goods for services performed in relation to
them). But, for a contrary view, see Mack Motor Truck Corp. v. Wolfe,
303 S.W.2d 697 (Mo. Ct. App. 1957) (stating that no lien for storage
exists at common law.); Minnehoma Financial Co. v. Pauli, 565 P.2d
835 (Wyo. 1977) (stating there was no common-law lien for storage,
and therefore, such a lien can only be acquired by statute); Fitzhugh v.
City of Douglas, 596 P.2d 737 (Ariz. Ct. App. 1979) (stating that right to
a lien for storage costs is strictly statutory, and such a right did not exist
at common law); Williams v. International Co., 141 P.2d 837 (Or. 1943),
overruled on other grounds, Rogue Val. Mem. Hosp. v. Salem Ins., 510
P.2d 845 (Or. 1973) (stating there is no common-law lien right for
recovery of costs for storage of vehicles). Further, even though a state
may have at one time recognized a common-law lien, such commonlaw rights can be abrogated by later statute.
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Inc., 66 Ill.2d 140, 143 (Ill. 1977) (stating
that the “the artisan’s possessory lien of the
common law is recognized in Illinois” and
that since the artisan’s lien is nonstatutory,
the statutory subordination provision in
§9-310 [RA9-333] is not applicable).
Conclusion
The situation presented to our
warehouseman is not unlike that presented
to a reclamation creditor whose recovery
on an otherwise valid claim is trumped by
a secured creditor with a previously
perfected security interest. Our warehouseman’s odds of priming the secured
lender are improved by a showing that the
secured lender consented, by loan
agreement or perhaps otherwise, to the
customer’s placement of the goods in
storage, since such showing goes to the
hypothetical “good-faith purchaser” or
“bona fide pledgee” requirements of §7209. Our warehouseman may also argue
that state common law or statute gives it
an additional possessory storage lien not
subordinated under RA9-933. ■
Reprinted with permission from the ABI
Journal, Vol. XXV, No. 1, February 2006.
The American Bankruptcy Institute is a
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has more than 11,000 members,
representing all facets of the insolvency
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at www.abiworld.org.
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ABI Journal
April 1995
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