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Secured Lender v. Artisan's Lienholder: Who Wins When Artisan Involuntarily Loses Possession?

Article 9 security interests sometimes come into conflict with liens created by statutes that were enacted long before the Uniform Commercial Code was conceived, and while much effort has been made to harmonize the UCC with such statutory liens, ambiguities remain. An illustration of this problem arose in the recent case of Bellamy’s, Inc. v. Genoa Nat’l Bank (In re Borden), 2007 WL 703153 (8th Cir. BAP 2007), which involved a priority dispute between a secured lender and a repair shop that claimed an artisan’s lien under Neb. Rev. Stat. § 52-201 on certain equipment owned by a debtor.

By way of background, Nebraska law provides a statutory lien to persons (called “artisans”) who provide improvements to certain items of personal property, specifically providing that:

Any person who makes, alters, repairs, or in any way enhances the value of any vehicle, automobile, machinery, farm implement, or tool or shoes a horse or mule at the request of or with the consent of the owner or owners thereof shall have a lien on such vehicle, automobile, machinery, farm implement, tool, horse, or mule while in such person’s possession for the reasonable or agreed charges for the work done or material furnished and shall have the right to retain such property until such charges are paid.

Neb. Rev. Stat. § 52-201(1). An artisan with a lien under § 52-201(1) has priority over a prior perfected security interest. See Neb. Rev. Stat. UCC § 9-333 (granting priority to possessory liens provided for by statute). This priority rule is an exception to the general rule that gives priority to the first in time.

The issue before the bankruptcy court in Bellamy’s was whether an artisan loses its priority if it does not maintain continuous possession of the equipment. The secured lender obtained a perfected blanket security interest in the debtor’s assets, including the debtor’s machinery and equipment, in 2002. In late 2004 the debtor, on separate occasions, took a corn head and a tractor it owned to an artisan to be repaired. The artisan repaired the equipment and sent the debtor a bill for the corn head in February 2005 and one for the tractor in March 2005. The debtor was unable to pay for the repairs, so the artisan retained possession of the equipment.

The debtor filed a bankruptcy petition on April 1, 2005, while the tractor and corn head were still in the artisan’s possession. In June that year, however, the debtor removed the tractor from the artisan’s lot, without first obtaining the artisan’s permission, and drove it to his farm, where he used it in his farming operation. The artisan, after learning that the tractor was no longer in his possession, contacted the debtor, who confirmed that he had taken it but promised to return it to the artisan when he was finished using it. In the fall of 2005, the debtor in fact returned the tractor to the artisan’s premises.

In September 2005, the debtor, again without permission from the artisan, took the corn head off the artisan’s lot for use in harvesting corn. When the artisan contacted him, the debtor promised to return the corn head once he was finished harvesting, and in fact he did return it in November 2005.

In April 2006, the secured party filed a motion seeking a determination of the relative priority of its security interest and the artisan’s lien. In deciding the issue, the bankruptcy court first noted that there were no Nebraska state-court cases addressing this issue and that courts in other jurisdictions considering the issue have come to differing conclusions. The court concluded that § 52-201 should be interpreted to require the artisan to maintain continuous possession in order to retain priority over a competing security interest, noting that a contrary conclusion (1) would lead to secret liens in situations where artisans turn over liened property to the debtor, and (2) would allow the debtor to determine the priority of competing creditors’ liens, based on the debtor’s decision whether or not to return the property to an artisan’s possession. The court alternatively found that even if continuous possession were not required, the artisan had no right to regain possession of the equipment from the debtor and thereby re-establish its lien without the court’s permission, because the automatic stay that went into effect upon the debtor’s bankruptcy filing would have prevented any such action. Accordingly, the court found that the secured lender had priority over the artisan.

The artisan appealed to the Eighth Circuit Bankruptcy Appellate Panel (BAP), which reversed the decision of the bankruptcy court. The BAP narrowed the issue to whether an artisan has a possessory lien where it loses possession involuntarily and then regains possession without court authority. The court found the artisan’s lien statute to be silent on this issue, but concluded that the better view is that an involuntary loss of possession does not defeat an artisan’s lien. Rather than reasoning from the statutory text or from principles of statutory interpretation, the court justified its conclusion by reference to the fairness of the outcome. The court noted that the policy behind the artisan’s lien statute was to satisfy the demands of “natural justice and commercial necessity” that the entity that enhances the value of property should be entitled to compensation for such enhancement. Allowing the artisan to prevail where it lost possession of the property involuntarily would further the goals of the artisan’s lien statute, because the value of the secured lender’s collateral was enhanced by the artisan’s work, and the secured lender was not prejudiced by the artisan’s loss of possession.

The BAP rejected the bankruptcy court’s concern about the uncertainty that would result from allowing possessory liens to continue where the lienholder lost possession, stating in essence that the desire for certainty must give way to the purpose of the artisan’s lien statute where the lienholder has lost possession involuntarily. The BAP also pointed out, regarding the bankruptcy court’s concern about the debtor controlling the relative priorities of the creditors, that the bankruptcy court’s decision accomplished the very thing it set out to avoid by allowing the debtor to dictate the respective priorities between the artisan and the secured lender, based on the debtor’s initial decision to take the equipment wrongfully. Lastly, as for the bankruptcy court’s determination that the automatic stay would have prevented the artisan from obtaining possession or perfecting a lien post-petition, the BAP found that the bankruptcy court missed the larger picture. The BAP pointed out that the petition date controls the allowance of claims in bankruptcy and that the artisan had a perfected lien on the petition date. As such, the artisan’s lien had priority over the secured lender’s security interest.

The majority’s opinion in Bellamy’s drew an important dissent from Chief Judge Kressel, who said the majority had engaged in the legislative process by adding to § 52-201 the concept of continued perfection notwithstanding a loss of possession. Judge Kressel cited the general principle of Nebraska law that statutory language is to be given its plain and ordinary meaning, and found that the plain language of § 52-201 does not provide for continuous perfection after an artisan has lost possession. The dissent noted that the result of the majority’s decision seems fair, but he could conceive of situations where the rule established by this case would not be fair. For example, if the debtor in this case had not returned the equipment but rather had sold it to a bona fide purchaser, “the majority’s holding would seem to indicate that the purchaser purchased the equipment subject to [the artisan’s] lien.” Judge Kressel stated that he would leave the balancing of such issues to the legislature, and since § 52-201 “unequivocally provides for a first priority possessory lien only until possession is lost,” he would have held that the secured lender’s lien had priority.

Neither the majority nor the dissent in Bellamy’s cites the Nebraska Supreme Court case of U.S. Nat’l Bank v. Atlas Auto Body, Inc., 214 Neb. 597, 335 N.W.2d 288 (1983). There, the court found that an artisan’s lien under § 52-201 took priority over a secured lender’s purchase-money security interest in a vehicle, which had been perfected by notation on the vehicle’s certificate of title. In determining the extent to which the artisan’s lien should prevail, the court made this statement: “In order for [the artisan] to retain its possessory lien under § 52-201, it is required by law to maintain possession of the vehicle, thereby storing the vehicle until it determines to foreclose on said vehicle.” This statement was made in connection with the court’s finding that the storage charges the artisan incurred did not enhance the value of the vehicle and therefore were not entitled to the same priority as the charges for repairs made, so the statement might be characterized as dicta. It nevertheless indicates that the Supreme Court views § 52-201 as requiring that the artisan actually possess the property at issue in order to have priority over a competing security interest. This should have been compelling evidence of how the Nebraska Supreme Court would have decided the question involved in the Bellamy’s case, which is what federal courts must evaluate when considering unsettled questions of state law.

The Nebraska Supreme Court’s statement in Atlas undercuts the primary justification for the court’s decision in Bellamy’s. However, the Bellamy’s outcome might still be justified based on the BAP’s alternative holding. As the court noted, “the petition date controls the allowance of claims in bankruptcy.” The artisan in this case had a valid possessory lien on the petition date, which had priority over the secured lender’s claim under Nebraska law. The BAP found that nothing in the Bankruptcy Code alters that result, so the artisan should have priority over the secured lender. The problem with this argument is that the sections of the Bankruptcy Code dealing with claims provide that the amount of a claim is governed by the petition date, but they do not state whether the determination of the secured status of claims is likewise governed by the petition date. The BAP assumed that it is, but the statutory language does not compel that conclusion, and there appears to be little, if any, case law on the issue. There is case law stating that the extent of a security interest may be evaluated as of various dates, depending on the context in which it is being determined. This would seem to call into question whether the secured status of a claim is necessarily tied to the petition date.

Another possible justification for the outcome in Bellamy’s is that regardless whether the artisan lost its lien when the debtor took the equipment from its possession, the artisan’s lien statute states that the artisan has a lien while the equipment is in the possession of the artisan and contains no requirement of continuous possession. The artisan’s lien, therefore, arguably became a valid possessory lien once the equipment was returned. The problem with this argument, as pointed out by the bankruptcy court, is that upon the filing of the debtor’s bankruptcy petition, the automatic stay went into effect, preventing any action to obtain possession of property of the estate or to create or perfect a lien against property of the estate. The artisan’s response was that the artisan did not actually take any action to obtain possession or create or perfect a lien. Rather, the debtor’s actions in returning the equipment were what caused the artisan to regain possession.

As the discussion above shows, the Bellamy’s case raises many issues that can come into play in contests between artisans and secured lenders, but it does not satisfactorily settle very many of them. The case does show, however, the lengths to which courts may go in order to protect artisans and produce what is perceived to be a fair result in a given case.