Business Law

Hidden Liens Report of the UCC Committee

While practitioners are aware of liens frequently encountered in practice, such as those arising under the California Commercial Code or placed on real property, judgment liens and tax liens, California has also authorized a large number of other liens that will not show up in a search of public records. Some of these “hidden liens” may have priority over consensual security interests under California Uniform Commercial Code section 9-333(b). These “hidden liens” are the subject of the The Commercial Transactions Committee’s (formerly the UCC Committee).

The full Hidden Liens Report (August 2013 revision) is now posted online.

I. Introduction – Hidden Liens Report

Attorneys and non-attorneys alike are quite familiar with liens. The most frequently encountered liens arise from a limited category of circumstances such as liens against real or personal property to secure loans, wage garnishments, liens imposed for failure to pay taxes and mechanics’ liens. However, liens may be imposed in a variety of circumstances, and in California the power to create liens is found in several different chapters of the California statutory codes. Not surprisingly, the process of creating liens varies and determining the relative priority of these liens can be complicated.

Many practitioners are aware of the types of liens created under Division 8 or 9 of the California Commercial Code, real property liens, judgment liens, and liens created under federal statutory schemes (e.g., aircraft, copyrights). Notice of the existence of many of these types of liens can be obtained from a search of public recording systems, such as the Secretary of State’s Office, real property records, or the U.S. Copyright Office. There are, however, another group of liens that are not evidenced in a public record, which makes uncovering them especially difficult for debtors and secured parties alike. Often, these liens are possessory in nature which makes them difficult to discover unless a practitioner knows to do the required due diligence to discover them. These so-called “hidden liens” are the subject of this report.

We are not aware of any generally available comprehensive compilation of the types of hidden liens that exist under California and federal law. This information void has a mystical quality to it as many practitioners do not even attempt to become familiar with the different types of liens that exist in part because of the expanse of the subject and the perceived unlikelihood of encountering a hidden lien that is material. It is often the case, therefore, that transaction parties and their attorneys are surprised to learn of a “hidden lien” that interferes with the parties’ interests including the priority of a security interest arising under Division 8 or 9 of the California Commercial Code. This report represents a continuing effort by the Commercial Transactions (formerly UCC) Committee of the Business Law Section of the State Bar of California (the “Committee”) to demystify “hidden liens” by identifying, indexing and describing liens that can be created under federal or California statutes other than pursuant to a typical secured loan transaction.1

The Table of Contents of this report contains an extensive list of liens that the Committee has assembled by reviewing federal and California statutes. These liens fall into six broad categories:

A. Liens arising in sales transactions,

B. Liens for performance of services,

C. Liens arising in litigation,

D. Agricultural liens,

E. Tax and other governmental liens, and

F. Liens on particular types of personal property.

The liens identified in bold face on the table of contents are discussed in detail in the balance of the report.2 The Committee identified the liens that are most likely to be encountered by transaction parties for discussion in this report. Placeholder language has been included in this updated report for the liens that have not yet been summarized, but which the Committee intends to summarize in future updates of this report. The discussion that follows for each lien identified in bold face includes the manner in which the lien arises, attaches and is perfected, how priority is determined, recommendations for identifying and protecting the secured party against the lien, the types of obligations that can be secured by the lien, and the types of collateral and classes of persons that are subject to the lien.

A few words of caution are appropriate. The hidden liens were created under many different types of laws, by different legislative bodies (the U.S. Congress and California legislature) and at different times. Therefore, there certainly are intricacies and nuances that will be grasped only by experienced practitioners in the specific area, and by writing this report, we do not profess to be such practitioners. Our approach has been to provide an introduction to the hidden lien based upon what could be discerned directly from a plain statutory reading and, in some situations, any leading cases in the area. In addition, a byproduct of the sheer breadth of this report is that the lien analyses were prepared at different times. Although we have performed considerable review and updating, the analysis in a particular area may not necessarily provide the most current information as of the date of this report. While we believe this report can serve as a starting point for identifying hidden liens that may arise in certain transactions, it should not be considered a definitive authority on these subjects.

Finally, the Committee gratefully acknowledges the Insolvency Committee of the Business Law Section of the State Bar of California and the Agribusiness Committee of the Business Law Section of the State Bar of California for their contribution to the completion of the report.

I. Personal Property Secured Transaction

A. Scope of Article 9 and Existence of a Secured Transaction

1. General

  • Delphi Automotive Systems, LLC v. Capital Community Economic/Industrial Dev. Corp., 434 S.W.3d 481 (Ky. 2014) – Kentucky’s non-uniform § 9-109(d), which excludes from the scope of Article 9 “a public-finance transaction or a transfer by a government or governmental unit,” applies only to transactions in which the government is a debtor, not a secured party. Accordingly, a transaction in which a state agency leased equipment to a private entity for 84 months, after which the private entity was to become the owner of the equipment, and thus was truly a sale with a retained security interest, was within the scope of Article 9. Because there is no public policy exception to Article 9’s perfection requirements when a state agency is the secured party, the state agency’s unperfected security interest was subordinate to the perfected security interest of a lender.
  • Delphi Automotive Systems, LLC v. Capital Community Economic/Industrial Dev. Corp., 434 S.W.3d 481 (Ky. 2014) – Court evaluates two key scope questions – (1) whether a transaction was a lease or security interest (security interest) and (2) whether a governmental unit exclusion from Article 9 excluded transactions in which the government unit was the secured party.
  • In re Polke, 2014 WL 5474632 (Bankr. N.D. Ga. 2014) – Transaction by which creditor paid off the initial lender in a car title pawn transaction, received title in his name, and obtained a security agreement and promissory note from the debtor was a secured transaction because, by everyone’s account, the car was to belong to the debtor once she made all of the payments. Even though Georgia statutes govern title pawns and afford fewer protections to the debtor than the UCC, such transactions are still secured transactions, not absolute sales. Moreover, the creditor did not comply with the title pawn statute either in the form of documentation or the procedures on default. By selling the car without sending prior notification to the debtor, the creditor failed to comply with the UCC and is subject to a claim for damages by the debtor.
  • Strata Title (BAP 9th Cir Feb 21 2014): forfeiture of LLC interest as “security interest.”

2. Insurance

3. Licensing

  • In re Circle 10 Restaurant, LLC, 519 B.R. 95 (Bankr. D.NJ 2014) – Liquor license and its proceeds are not ‘property’.

4. Consignments

  • In re Salander-O’Reilly Galleries, LLC, 506 B.R. 600 (Bankr. S.D.N.Y. 2014) – Court evaluates competing claims of lenders and consignor in famous Botticelli painting. Case is a reminder that an Article 9 consignment is treated as a purchase money security interest, requiring a UCC financing statement and potentially notices to prior creditors.
  • Shrenuj USA, LLC v. Rosenthal & Rosenthal, Inc., 2014 WL 1226469 (S.D.N.Y. 2014) – While summary judgment would not be granted on jewelry consignor’s conversion claim against lender that financed the debtor’s inventory because of a factual dispute about whether the lender seized and sold any of the consigned goods, sanctions were appropriate against the lender because it continued to sell and melt down seized jewelry long after it knew that litigation was likely and even after the consignor’s complaint was filed, and those actions undermined the consignor’s ability to prove that the lender had seized consigned goods.

5. Real Property

  • Burton v. Lucido, 82 U.C.C. Rep. Serv. 2d 801 (N.Y. Sup. Ct. 2014) – Security interest in a real estate broker’s right to a commission was not excluded from Article 9 by § 9-109(d)(3) as compensation to an employee because the broker is an independent contractor, not an employee, or by § 9-109(d)(5) as an assignment of accounts for collection only because the right to the commission secured a loan to the broker.
  • Warrior Energy Services Corporation v. ATP TITAN M/V, 551 Fed.Appx. 749 (5th Cir. 2014) – Offshore oil drilling rig was not a “vessel” for purposes of maritime lien act where it was permanently moored to the ocean floor, had not been moved since constructed, had no means of self-propulsion, and would require over a year and $70-$80 million to move.
  • In re Anderson, 2014 WL 172222 (Bankr. D. Utah 2014) – Despite a state statute providing that water shares – rights to use water evidenced by shares of stock in a corporation – shall be transferred pursuant to U.C.C. Article 8, such shares remain real property, not personal property, and hence a security interest in them can be perfected through a properly recorded deed of trust.
  • In re Faison, 2014 WL 5281053 (Bankr. E.D.N.C. 2014) – Husband who, in connection with divorce proceedings, filed lis pendens against wife did not thereby perfect any interest he might have in the wife’s 20% interest in an LLC, which is a general intangible. Filing a financing statement is the only way to perfect an interest in a general intangible.
  • Quarles v. D&D Transport, Inc., 2014 WL 6685479 (Ky. Ct. App. 2014) – Assignee of unperfected security interest in manufactured home had priority over buyer of real estate to which the home was attached because the security interest was enforceable even though unperfected and the buyer acquired no interest in the manufactured home because the manufactured home was not converted to real estate under state law and was expressly excluded from the tax sale deed.

6. Leasing

  • In re Purdy; Sunshine Heifers, LLC v. Citizens First Bank, 763 F.3d 513 (6th Cir. 2014) – Dairy cow leases were true leases, not disguised security interest; reverses lower court decision.
  • In re Purdy, 763 F.3d 513 (6th Cir. 2014) – 50-month leases of dairy cows were true leases even though the lessee had no right to terminate and 50 months exceeds the economic life of dairy cows, 30% of which need to be culled each year. The relevant “good” was the herd of cattle, which had an economic life far greater than the lease term, not the individual cows originally provided.
  • Sunshine Heifers, LLC v. Moohaven Dairy, LLC, 13 F. Supp. 3d 770 (E.D. Mich. 2014) – Postpetition lease of 240 cows to a dairy for 48 months was a true lease because, even though the transaction was not terminable by the dairy, there was no option or obligation to renew the lease or to buy the cows, and the term of the lease did not exceed the economic life of the cows because data indicates that more than 57% of cows produce milk for longer than four years. Accordingly, the transaction was in the ordinary course of business of the dairy and consistent with the confirmed plan, and thus did not need bankruptcy court approval.
  • In re Gutierrez, 2014 WL 3888277 (Bankr. D.P.R. 2014) – Six-year lease of automobile, after which the putative lessee had the option to purchase the automobile for $150 was a true lease because the agreement expressly provided that it was a finance lease under the Puerto Rice Act to Regulate Personal Property Lease Contracts, not a secured transactions, and thus the lessee had waived the right to have the lease treated as a secured transaction.
  • In re James, 2014 WL 5785316 (Bankr. D. Kan. 2014) – Three-year lease of used vehicle was a sale with a retained security interest because even though the debtor could terminate the lease early, the debtor remained obligated for the rent due during the entire rental period, and the debtor had an option to purchase during the lease term by paying the remaining rent, an option which a rational lessee would exercise.
  • In re ES2 Sports & Leisure, LLC, 519 B.R. 476 (Bankr. M.D.N.C. 2014) – 40-month lease of exercise equipment that was not subject to cancellation and unde
    r which the lessee had an option to purchase the equipment at the end of the lease term for $1 was not a true lease, but instead a sale and retained security interest. This conclusion was bolstered by the fact that lease payments exceeded $262,000 but the value of the equipment when delivered was less than $200,000.

7. Sales

  • Clinton v. Adams, 2014 WL 6896021 (C.D. Cal. 2014) – Even if law firm had a security interest in its client’s copyright infringement action, that security interest was outside the scope of Article 9 because the firm received merely a promise to pay money that might accrue in the future as a means of collecting its fees and § 9-109(d)(5) excludes an assignment of payment intangibles “which is for the purpose of collection only” and § 9-109(d)(9) excludes an assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral.
  • In re Doctors Hospital of Hyde Park, 504 B.R. 900 (Bkrtcy. N.D. Ill. 2014) – This ongoing litigation has led to several key court decisions on fraudulent transfers, spvs, enforceable loan terms and more. This iteration evaluates UCC security interests.
  • ConocoPhillips Alaska, Inc. v. Williams Alaska Petroleum, Inc., 322 P.3d 114 (Alaska 2014) – Agreement by which crude oil buyer provided $13 million to seller following seller’s demand for adequate assurance of the buyer’s ability to comply with a retroactive price increase that might be mandated by the Federal Energy Regulatory Commission, which funds were segregated pending resolution of the FERC action, was a modification of the parties’ sales agreement governed by Article 2, not a security interest governed by Article 9, and § 2-207 applied to resolve the interest rate to which the buyer was entitled on those funds.
  • In re C.W. Mining Company, 509 B.R. 378 (Bankr. D. Utah 2014) – Agreements by which coal broker purported to prepay mining company for coal to be mined and expressly provided that the broker would be the owner of the coal upon severance of the land, but which also purported to grant the broker a security interest in the proceeds of all of the debtor’s coal sale contracts did not mean that broker owned the receivables from such contracts. Even though the broker was the party that sent the invoices, the mining company owned the receivable and the broker had merely a security interest. That security interest was not excluded from Article 9 by § 9-109(d)(5) or (6) and, because it was unperfected, was therefore junior to the interests of the mining company’s bankruptcy trustee.
  • Southern Fidelity Managing Agency, LLC v. Citizens Bank & Trust Co., 82 U.C.C. Rep. Serv. 2d 412 (D. Kan. 2014), rev’d, In re Brooke Capital Corp, 2014 WL 6873180 (10th Cir. 2014) – Regardless of whether the participation interests in a loan secured by shares of stock were sales of a fractional interest or secured loans, the participants acquired a security interest in the stock because the participation agreements expressly so provided and those security interests were perfected under § 9- 310(c) because the originator’s interest was perfected by possession. The originator’s subsequent subordination agreement with another secured party was not binding on the participants because the participation agreement required the participants’ consent to any subordination agreement.On appeal, because the participants’ interests were loans to the originator secured by a general intangible (the secured receivable), not sales of fractional interests in the loan, the participants’ interests were not automatically perfected. Because the participants did not file a financing statement, their interests were unperfected and thus subordinate the interest of another secured party with a perfected security interest.
  • Cox v. Community Loans of America, Inc., 2014 WL 1216511 (M.D. Ga. 2014) – Car title pawn transactions with members of the armed services were not sales with an option to repurchase but secured loan transactions subject to the federal Military Lending Act, even though the service member has no personal liability for the amount advanced. Thus, the pawnbrokers could be liable for their violations of the act.
  • Bankdirect Capital Finance v. Insurance Co. of State of PA, 992 N.Y.S.2d 271 (N.Y. App. Div. 2014) – The trial court properly denied summary judgment on the claim of a putative assignee of an insurance premium financing agreement against the insurer for refunding the premium to the broker because it was unclear whether: (i) the policy holder transferred its entire interest or merely a security interest in the return premium; (ii) the original financier properly notified the insurer of its interest; (iii) the original financier assigned its interest to the putative assignee; and (iv) the putative assignee properly notified the insurer of the assignment.

8. Intellectual Property and Licenses

  • In re Free Lance-Star Publishing Co. of Fredericksburg, 512 B.R. 798 (Bkrtcy. N.D. Va. 2014) – Case regarding security interests in FCC licenses; result is not helpful to secured parties.
  • United Tactical Systems, LLC v. Real Action Paintball, Inc., 2014 WL 6788310 (N.D. Cal. 2014) – Entity that allegedly bought all of the debtor’s tangible and intangible property, including the trademarks and goodwill, at a UCC foreclosure sale did not prove likelihood of success in its claim under § 32 of the Lanham Act, so as to be entitled to a preliminary injunction, because that claim (as distinguished from a claim under § 43(a)) can be brought only by the “registrant,” and the buyer failed to prove that it was the registrant despite evidence of an assignment nunc pro tunc and bill of sale from the secured party to itself, and a later written assignment from the secured party to the buyer. There was no evidence of an assignment from the debtor to the secured party.
  • Merit Homes, LLC v. Joseph Carl Homes, LLC, 570 F. App’x 707 (9th Cir. 2014) – Because the bank that made a construction loan received from the borrower a collateral assignment of the construction plans for the benefit of itself, as well as for its successors and assigns, and the borrower warranted that it had received from its predecessors an assignment of all rights to the plans, the bank and its assignee had at least an implied license from the apparent copyright owner – a guarantor and partial owner of the debtor – to use the plans to complete construction.
  • In re Trump Entertainment Resorts, Inc., 2015 WL 756873 (Bankr.D.Del. 2015) – Rights of trademark licensee not assignable without affirmative consent of licensor.

9. Tort and Insurance Claims

  • In re: Montreal Maine & Atlantic Railway Ltd., 2014 Bankr. LEXIS 1628 (Bankr.D.Maine 2014) – Security interest in intangible assets does not extend to a business insurance policy under the 9-109 insurance exclusion.
  • Attorney’s Title Guaranty Fund, Inc. v. Town Bank, 850 N.W.2d 28 (Wisc. 2014) – Evaluating the question of whether the proceeds of a legal malpractice claim are assignable, court concludes that the proceeds were assignable. The court goes to great lengths to support secured creditors.
  • Pain Control Institute, Inc. v. GEICO General Insurance Co., 2014 WL 5474777 (Tex. Ct. App. 2014) – Even if the woman injured in an auto accident had a claim against the driver’s insurer, so that she could grant a security interest in that claim to the medical provider that treated her, such a security interest would be excluded from the scope of Article 9 under § 9- 109(d)(12).
  • In re Montreal, Maine & Atlantic Railway, Ltd., 83 U.C.C. Rep. Serv. 2d 461 (Bankr. D. Me. 2014), aff’d, 2014 WL 6929581 (1st Cir. BAP 2014) – Creditor’s security interest in the debtor’s accounts and payment intangibles did not extend to the debtor’s right t
    o payment under its business interruption insurance policy because Article 9 does not apply to an interest in or a claim under an insurance policy and to have a security interest under Maine common law possession of the policy is required, which the creditor did not have.
  • Joseph Skilken & Co. v. Oxford Aviation, Inc., 2014 WL 5361336 (D. Me. 2014) – Because a judgment creditor is entitled to turnover of and a lien on only the property in which a creditor could obtain an Article 9 security interest, the creditor in this case was not entitled to a lien on the judgment debtor’s claim against the underwriter of an insurance policy on the debtor’s aircraft because a lien on such claim is “arguably” excluded from Article 9 under § 9-109(d)(8) or (12).

B. Security Agreement and Attachment of Security Interest

1. Security Agreement

  • Weinandt v. Peckham, 84 U.C.C. Rep. Serv. 2d 118 (Minn. Ct. App. 2014) – A filed financing statement did not, by itself, satisfy the requirement for an authenticated security agreement even though the debtor filled in the form by hand because the debtor did not authenticate the financing statement.
  • In re Eyerman, 517 B.R. 800 (Bankr. S.D. Ohio 2014) – Individuals who guaranteed the debts of two LLCs that they owned had not granted a security interest in their personal property to secure the debts because each security agreement identified the “borrower” as one of the LLCs and the guarantors signed only as a “member” of the LLCs, not in their individual capacities. Although a filed financing statement identified the guarantors as additional debtors, the financing statement lacked granting language and does not constitute a security agreement.
  • In re Inofin, Inc., 512 B.R. 19 (Bankr. D. Mass. 2014) – Original security agreement that described the collateral to be installments sales contracts “purchased by Debtor with the proceeds of loans from Secured Party and assigned and delivered to Secured Party” did not include chattel paper not financed by the secured party, and because the secured party could not show that any installment contracts were traceable to the proceeds of its loans, the security agreement was ineffective to grant a security interest. Subsequent loan agreement did not remedy the problem because it lacked granting language. However, the parties’ course of performance over 15 years in which the debtor, in return for financing, weekly delivered installment contracts with allonges stating that the debtor “hereby assigns [to Secured Party] all of its right, title and interest in, to and under the following [Retail Installment Sale Agreement]” was sufficient to serve a security agreement and grant a security interest in the delivered contracts, regardless of whether those contacts were purchased with the loan proceeds. Moreover, the loan modification agreement entered into by the parties modified the scope of the security interest and granted the secured party a security interest in all delivered installment contracts.
  • Saili v. Parkland Auto Center, Inc., 329 P.3d 915 (Wash. Ct. App. 2014) – Because the purchase agreement for a GMC car, pursuant to which the buyer purported to grant a security interest in both the GMC and in a Chevy, was conditioned on financing that was denied, the agreement was void, thus the seller did not acquire a security interest in the Chevy, and the seller committed conversion by repossessing the Chevy.
  • Tough Company, Inc. v. Wurlitzer, 2014 WL 298699 (Cal. Ct. App. 2014) – Credit buyer of a truck, a trailer, and a bulldozer had granted a security interest in all three items even though the bill of sale did not mention a security interest because all documents relating to the transaction can be read together, the title documents for the truck and trailer identified the seller as a lienholder, the seller testified he believed the bill of sale was granted as security, and a bill of sale, although absolute in form, may be shown in fact to have been given as security.
  • Jones v. Simon, 2014 WL 3695818 (W.D. Ky. 2014) – Settlement Agreement pursuant to which the debtor promised to pay $30,000 within one year, unless specified pending litigation was “successfully mediated or settled” sooner, in which case the debtor would have six months from the date of the mediation or settlement to pay, did not give the creditor a security interest in the settlement proceeds. The settlement agreement addressed whenpayment would come due; it did not discuss a source of funds or indicate whether any property would secure the obligation.
  • In re Pallet Company LLC, 2014 WL 432790 (Bankr. D. Del. 2014) – Law firm that represented the bankruptcy debtor in its pending tort litigation had no lien on the proceeds of the sale of the debtor’s assets – including the pending tort claims – because the sale order provided for liens to attach to the proceeds to the extent of their value and validity at the time of the sale but the law firm did not have a valid charging lien at the time of the sale because a charging lien does not arise until a judgment is issued.
  • Jackson Walker LLP v. FDIC, 13 F. Supp. 3d 953 (D. Minn. 2014) – Law firm had no security interest in retainer paid to it because the retainer agreement, although it stated that the law firm could apply the retainer to the payment of fees and expenses from time to time, did not commit the retainer as a means to ensure payment and in fact contemplated that the client would timely pay for services through direct billing. Further, the retainer served as advanced payment because the agreement provided that it would be applied toward the final statement. Even if the retainer agreement were a security agreement, the additional $100,000 retainer provided later was not collateral because the agreement provided that it could only be modified by a signed writing.
  • Clinton v. Adams, 2014 WL 6896021 (C.D. Cal. 2014) – Law firm did not acquire a security interest in its client’s copyright infringement action because the “Assignment of Monies” signed by the client did not expressly grant a security interest in or assign the action. Instead, the client merely agreed “to irrevocably assign any and all money due to [him] based on the claim(s) made” in infringement action, and thus merely promised to pay proceeds from the action that may accrue in the future.
  • In re Jeter, 2014 WL 993043 (Bankr. E.D. Tenn. 2014) – Financier that provided nonrecourse funding to accident victim and in return received an assignment of a portion of the victim’s right to proceeds of his tort claim obtained an outright assignment valid under New Jersey law even though the agreement contained a backup grant of a security interest because the agreement contained clear evidence of the intent to assign the proceeds, the proceeds were described sufficiently to identify what was covered, and the victim retained no power to revoke the assignment.
  • Commercial Law Corp. v. FDIC, 2014 WL 413934 (E.D. Mich. 2014) – Even if the security agreement between a law firm and its bank client, which purported to secure the client’s obligation to pay for legal services, was signed before the FDIC took over, a fact the FDIC disputed, the security interest was nevertheless not effective against the FDIC because there was no evidence that the security agreement was approved by the bank’s board of directors or that such an approval was reflected in the minutes of a board meeting, as required by 12 U.S.C. § 1823(e).
  • In re STN Transport Ltd., 2014 WL 585311 (Bankr. S.D. Tex. 2014) – Even if a person who puts up collateral but is not an obligor on the secured debt qualifies as a “debtor” for the purposes of the Uniform Fraudulent Transfer Act, the corporation that owned trucks allegedly used to collateralize a loan to one of its directors did not grant a security interest in the trucks because the director lack
    ed authority to bind the corporation. The director lacked actual authority because the document purporting to grant that director authority to act for the corporation was signed only by that sole director, not by both of the directors. The director lacked apparent authority because the corporation did nothing to create the appearance that the director was authorized to act on the corporation’s behalf.
  • Terry J. Nosan Declaration of Trust v. GS CleanTech Corp., 2014 WL 2753150 (Mich. Ct. App. 2014) – While the guaranty agreements signed by the debtor’s affiliates stated that the note to a group of new lenders “shall be guaranteed by a pledge of the [debtor’s] net cash flows” and the subordination agreement signed by the prior lender stated that “[t]he Borrower shall be entitled to pledge the Net Cash Flow” to the new lenders, there was no security agreement signed by the debtor and thus the new lenders did not acquire a security interest.
  • Patterson v. University Ford, Inc., 758 S.E.2d 185 (N.C. Ct. App. 2014) – Because the retail installment contract for the purchase and sale of an automobile and the conditional delivery agreement were part of the same transaction and could be read together even though the retail installment contract contained a merger clause, and because parol evidence is admissible to show the existence of a condition precedent, the unsatisfied financing condition in the conditional delivery agreement prevented the existence of a contract.
  • Jackson Walker LLP v. Federal Deposit Insurance Corp., 2014 U.S. Dist. LEXIS 52373 (D.Minn. 2014) – Court concludes law firm did not have a security interest in retainer provided by client, finding insufficient evidence of an agreement to create a security interest.
  • Terry J. Nosan Declaration of Trust v. GS CleanTech Corp., 2014 WL 2753150 (Mich. Ct. App. 2014) – While the guaranty agreements signed by the debtor’s affiliates stated that the note to a group of new lenders “shall be guaranteed by a pledge of the [debtor’s] net cash flows” and the subordination agreement signed by the prior lender stated that “[t]he Borrower shall be entitled to pledge the Net Cash Flow” to the new lenders, there was no security agreement signed by the debtor and thus the new lenders did not acquire a security interest.

2. Obligation Secured

  • In re Duckworth, 2014 WL 6602521 (7th Cir. 2014) – Although security agreement that misdescribed the secured obligation as a note executed on December 13, 2008, when the note was actually executed and dated December 15, 2008, could be reformed as between the debtor and the secured party, it was not effective to perfect the security interest against the debtor’s bankruptcy trustee, who had the status of a judicial lien creditor and against whom parol evidence is inadmissible.
  • Heritage Bank v. Kasson, 853 N.W.2d 868 (Neb. Ct. App. 2014) – Parents, who had granted a security interest in their farm products to a bank to secure their debts were not in a partnership or joint venture with their son, who had granted the bank a security interest in his farm products to secure his obligations to the bank. Even though the parents and son occasionally shared equipment and resources, they held themselves out to be engaged in separate businesses, they obtained separate financing, they maintained separate accounts and records, they used different identifying marks on their cattle, and they maintained separate insurance on their equipment and herds. Thus, the parents were not liable for the son’s debts and the bank could not use the proceeds of the parents’ cattle to reduce the debt owed by the son.
  • Mount Spelman & Fingerman, P.C. v. GeoTag, Inc., 2014 WL 4954632 (E.D. Tex. 2014), 2014 WL 6065703 (E.D. Tex. 2014) (revised opinion) – Contingent fee agreement between a law firm and its client that granted the firm a lien on recoveries “for any amounts owing to us” and which also stated that “[f]ees are fully earned as of the date of execution of the settlement agreement between plaintiff and defendant,” created a lien only on amounts due in settled cases, even if the client owed the firm for services in connection with other cases or as a result of the client’s termination of the firm. Moreover, the lien on the receivable in connection with any single case is limited to the fee owing in connection with that case; it does not secure the client’s obligations in connection with other cases.
  • Matter of Liquidation of Freestone Insurance Co., 2014 WL 7399502 (Del. Ch. Ct. 2014) – Bank could not retain the assets credited to the custodial account of an insurance company, now in receivership, to protect the bank’s contingent right to indemnification because that right was not secured by the collateral. The custody agreement granted the bank a security interest to secure “payment obligations,” which, when the agreement is read in context, mean (i) costs incurred by the bank in providing the limited administrative services contemplated by the agreement, (ii) fees charged for those services, (iii) advances of funds by the bank to make payment on or against delivery of securities, and (iv) overdrafts in the account; the term “payment obligations” does not include claims for indemnification.
  • In re Duckworth, __ F.3d __ (7th Cir 2014) – Security agreement that misstated date of secured note by two days could not be reformed to refer to correct note.

3. Rights in the Collateral

  • Architectural Iron Workers’ Local No. 63 Welfare Fund v. American Steelworks, Inc., 2014 U.S. Dist. LEXIS 30675 (N.D. Ill. 2014) – Alleged collateral never became property of debtor.
  • Nautilus Insurance Co. v. Cheran Investments LLC, 82 U.C.C. Rep. Serv. 2d 560 (Neb. Ct. App. 2014) – Bank with a security interest in assets of seller had no right to insurance proceeds of goods sold to buyer who failed to pay therefor because the buyer acquired ownership of the goods despite the failure to pay. However, because the interpleader action brought by the insurer is an equitable proceeding, the bank had a security interest in the seller’s right to payment from the buyer, and the seller agreed that the proceeds should go to the bank, the trial court could direct that the insurance proceeds be paid over to the bank.
  • Southern Fidelity Managing Agency, LLC v. Citizens Bank & Trust Co., 2014 U.S. Dist. LEXIS 4344 (D.Kan 2014) – A question arose as to whether a contract assigned a security interest in stock or a security interest in the assignor’s security interest in the stock. Court concluded assignment was of the security interest in the stock, so assignee had a perfected security interest. Assignment was drafted as a participation, but recharacterized. Case includes a detailed analysis of UCC 9-310.
  • Vehicle Development Corp. v. Livernois Vehicle Development, LLC, 995 F. Supp. 2d 758 (E.D. Mich. 2014) – Bank with a perfected security interest in all inventory and equipment of a Michigan borrower that operated a vehicle repair facility did not have a security interest in the 81 trucks that a Singapore company provided to the borrower for conversion from left-hand drive to right-hand drive. The written agreement expressly stated that title to the trucks remained with the Singapore company and thus the borrower lacked sufficient rights in the trucks for the bank’s security interest to attach to them. Moreover, the trucks did not fit within the definition of either equipment or inventory.
  • Vehicle Development Corporation PTY LTD v. Livernois Vehicle Development, LLC., 995 F.Supp.2d 758 (E.D. Michigan, 2014) – Court concludes that the trucks held by debtor for purpose of repairs were not subject to security interest debtor granted in its assets because (a) the debtor did not appear to have sufficient rights or the power to transfer rights under UCC § 9-203 and (b) the trucks were not covered by the se
    curity agreement because they were not “inventory” (probably right) or “equipment” (on the unusual and incorrect theory that they were not “goods.).
  • Perini/Tompkins Joint Venture v. Comerica Bank, 2014 WL 1028945 (E.D. Mich. 2014) – Because, pursuant to the Michigan Builder’s Trust Fund Act a contractor holds building contract fund in trust for unpaid subcontractors and suppliers, a lender’s security cannot attach to those funds. The funds paid to the lender can be recaptured to the extent the subcontractors and suppliers were unpaid at the time of the payment but offset by the amount that the funds provided by the lender were used to pay subcontractors and suppliers.
  • Dougherty v. Trustmark Bank, 2014 WL 2767380 (Tex. Ct. App. 2014) – Although the individual debtor represented in a security agreement with a lender that he was the owner of specified property in which he purported to grant a security interest, the debtor’s sworn testimony three years later in bankruptcy that his corporation owned the property meant that the lender obtained no security interest. The representation in the security agreement was insufficient to create an issue of fact to avoid summary judgment in the lender’s action against the bank that later obtained and foreclosed on a security interest from the corporation.
  • Fifth Third Bank v. Gulf Coast Farms, LLC, 573 F. App’x 515 (6th Cir. 2014) – LLC that authenticated security agreement purporting to grant a bank a security interest in all its stallions, stallion syndicate agreements, fractional interests in stallions, and stallion shares did in fact grant a security interest in a share of Distorted Humor, a thoroughbred, because the evidence established that: (i) the owners of the dissolved partnership that previously owned the share contributed it to the LLC; (ii) the LLC reported the income subsequently produced from ownership of the share on its tax returns while the dissolved partnership did not file further tax returns; (iii) the income from the share was deposited into the LLC’s deposit account; and (iv) the LLC, not the partnership, insured the share. It was irrelevant that another entity had a right of first refusal on the partnership’s share because that right was never triggered due to the fact that the partnership and the LLC had common owners.
  • In re Webb, 2014 WL 5472568 (Bankr. E.D. Ark. 2014) – Although joint venture by husband and wife was not a partnership, merely an agreement about how they would conduct their farming business together, and thus not a legal entity, the security agreements signed by the husband on behalf of the venture were effective because the venture had more mere naked possession of the collateral, it had sufficient rights in the collateral to grant a security interest.
  • In re Webb, 742 F.3d 824, (8th Cir. 2014) – This case from the realm of secured agricultural lending determines a secured party did not have a valid security interest because it mistakenly treated the debtor as a separate legal entity.
  • Pain Control Institute, Inc. v. GEICO General Insurance Co., 2014 WL 5474777 (Tex. Ct. App. 2014) – Because under Texas law a person injured in an auto accident has no direct claim against the driver’s insurer, a woman so injured could not grant a security interest in her right to payment from the driver’s insurer to the medical provider that treated her. Consequently, the insurer did not, after settling with the woman, violate the provider’s rights by paying the woman directly despite having received instructions to pay the provider. No discussion of why the security interest could not attach to the right to payment under the settlement agreement.
  • Woodbridge Structured Funding, LLC v. Arizona Lottery, 235 Ariz. 25, 326 P.3d 292 (Ariz. Ct. App. 2014) – Structured settlement company had no interest in annuity where state-required court proceedings had not been completed and company had not given alleged assignor value required under 9-203.
  • Blanken v. Kentucky Highlands Investment Corp., 82 U.C.C. Rep. Serv. 2d 815 (E.D. Ky. 2014) – Language in a security agreement defining “excluding property” to consist of “any contract, lease, license, or other agreement that contains a provision prohibiting the assignment or grant of a security interest therein” did not exclude equipment that the debtor acquired in a transaction structured as a lease but which was really a sale with a retained security interest even though those transaction documents prohibited future encumbrances. Equipment is not a “contract, lease, license, or other agreement.” Moreover, the prohibition on further encumbrances was ineffective under UCC § 9-407 to prevent the attachment of a second security interest.
  • Dow Family, LLC v. PHH Mortgage Corp., 848 N.W.2d 728 (Wis. 2014) – The doctrine of equitable assignment survives in Wisconsin and has been codified by UCC § 9-203(g), so that a person who becomes a holder of a promissory note automatically becomes entitled to enforce a mortgage that secures the note.
  • In re Salander-O’Reilly Galleries, LLC, 506 B.R. 600 (Bankr. S.D.N.Y. 2014), rev’d, 2014 WL 7389901 (S.D.N.Y. 2014) – Bank’s blanket lien on art gallery’s inventory attached to consigned painting even though the security agreement provided that: (i) goods held on consignment were excluded from the borrowing base; and (ii) the gallery warranted that it had ownership of all “collateral.” However, a dispute about whether the consignor actually retrieved the painting after the consignment agreement expired and then returned the painting to the gallery for exhibition purposes prevented summary judgment on the issue of priority between the consignor and the bank.On appeal, court ruled that security agreement granting a security interest in “assets and rights of the wherever located, whether now owned or hereafter acquired or arising,” was limited to property then or thereafter owned by the gallery, and thus did not cover property held on consignment.
  • Hartford Fire Insurance Co. v. Columbia State Bank, 334 P.3d 87 (Wash. Ct. App. 2014) – Even though the agreement between an insurer and contractor for a surety bond provided that “[a]ll money paid [under the construction contract] shall be impressed with a trust for the purpose of satisfying the obligations of the Bond,” the insurer had no claim against the contractor’s secured lender for applying a progress payment deposited into a control account to the secured obligation. The agreement was not with the owner who provided the funds, did not provide that payments be held in trust for subcontractors, and did not actually require that the funds be “held” at all, merely “impressed” with a trust. Therefore, the contract provided for the creation of a trust at some point in the future, after the insurer made payment on the bond, which was after the secured party acted.
  • Wakefield Kennedy, LLC v. Baldwin, 2014 WL 910029 (D. Utah 2014) – Debtor that, pursuant to contract to sell a note and mortgage, placed the note into escrow had insufficient rights remaining in the note to grant a security interest in the note superior to the rights of the buyer.
  • Cantor v. FDIC (In re Downey Financial Corporation), _ F.3d _ (3d Cir. 2015) -Tax sharing agreement did not create agency relationship because alleged principal did not ‘control’ alleged agent; thus property in possession of ‘agent’ was agent’s property.

4. Restrictions on Transfer

  • Woodbridge Structured Funding, LLC v. Arizona Lottery, 326 P.3d 292 (Ariz. Ct. App. 2014) – Financier did not acquire a security interest in individual’s right to periodic payments of state lottery jackpot because even though the individual signed an assignment agreement with the financier before petitioning a court to approve an assignment to a different jackpot buyer, the financier had not paid the individual and
    thus had not given value for the security interest to attach.
  • Richter v. CC-Palo Alto, Inc., 2014 WL 6687238 (N.D. Cal. 2014) – Residents of retirement community who, as part of their residency contract, loaned funds to the owner of the retirement community, did not have a security interest in the funds because the documents failed to label the loan as “unsecured” or because lenders have a security interest in the property subject to the loan. The fact that state regulations might require the owner to maintain a statutory reserve for “refundable contracts” was immaterial because the residents did not allege that their contracts qualified as refundable contracts.
  • In re Circle 10 Restaurant, LLC, 519 B.R. 95 (Bankr. D.N.J. 2014) – New Jersey liquor license is not property for the purposes of state law even though it is property: (i) to which a federal tax lien can attach; (ii) for the purposes of due process; and (iii) that can be sold in bankruptcy. Because the debtor’s license is not property, it does not qualify as a general intangible, § 9-408 is inapplicable, and no security interest can attach to it.
  • Attorney’s Title Guaranty Fund, Inc. v. Town Bank, 850 N.W.2d 28 (Wisc. 2014) – Evaluating the question of whether the proceeds of a legal malpractice claim are assignable, court concludes that the proceeds were assignable. The court goes to great lengths to support secured creditors.
  • McDonald v. Yarchenko (D. Or. 2013) – LLC member consent may be necessary for creation of security interest in member’s interest.
  • Crossover Financial I, LLC (CO), 477 B.R. 196 (Bankr. D. Colo. 2012) – Possible limitations on proxies of LLC interests and may need consent of issuer under state LLC statute.

C. Description or Indication of Collateral and the Secured Debt — Security Agreements and Financing Statements

  • In re Eyerman, 517 B.R. 800 (Bankr. S.D. Ohio 2014) – Even if a promissory note and filed financing statement were together sufficient to indicate an intention by individual guarantors to grant a security interest, the documents’ only description of the collateral as “certain business assets” would not be sufficient to reasonably identify what was covered.
  • In re Nickeson, 2014 WL 6686524 (Bankr. D.S.D. 2014) – Security agreement that described the collateral as “all farming equipment and machinery, Farm Products, claims, accounts receivable, inventory, general intangibles, business tort claims, and all other business and agricultural assets owned by [Debtor]” did not cover the debtor’s stock in a closely held corporation, which is classified as investment property, not a general intangible. Although the filed financing statement identified the stock, it did not create or provide for the security interest and it was not signed by the debtor.
  • In re Sterling United; Ring v. First Niagara Bank, N.A., 2014 Bankr. LEXIS 4238 (Bankr.W.D.N.Y. 2014) – Court evaluates whether a collateral description in a financing statement is seriously misleading under Article 9. Court concludes filings were good enough to put subsequent searchers on notice.
  • Russell Road Food and Beverage, LLC v. Galam, 2014 WL 6746569 (9th Cir. 2014) – Even if the lender had attempted to enforce the guaranty, which granted a security interest in property “in the physical possession of or on deposit with the Lender,” that would not have covered the guarantor’s trademark. Although the guarantor’s corporate resolutions authorized the guarantor to give the lender a security interest in the trademark, the guarantor did not expressly provide such a security interest in the guaranty.
  • In re Conklin, 511 B.R. 688 (Bankr. D. Id. 2014) – Pursuant to a 2007 amendment to Idaho’s certificate-of-title statute, a security interest in a vehicle is perfected when a properly completed application for a certificate is received by the Department of Transportation or its agent, not the date the certificate is issued. Because that date was within 30 days of when the debtor acquired the vehicle, the bankruptcy trustee could not avoid the security interest.
  • In re Inofin, Inc., 512 B.R. 19 (Bankr. D. Mass. 2014) – Security Agreement describing collateral as installment sales contracts purchased with loan proceeds not effective to attach security interest where no records tracing particular contracts to loan proceeds.
  • In re Baker, 511 B.R. 41 (Bankr. N.D.N.Y. 2013) – Financing statement that identified collateralized cattle by name and ear tag number was ineffective with respect to cattle whose ear tag had either fallen off or did not match one of the listed numbers. While the names of the cattle were referenced in a certificate of registration for each cow, each certificate included a sketch of the cow’s distinctive markings, and those markings could be used to identify the cows, there was insufficient evidence that lenders to the cattle industry, in the course of their due diligence, regularly used registration certificates to identify cattle subject to a prior interest for the certificates to overcome the deficiencies in the financing statement.
  • In re Sterling United, Inc., 2014 WL 4966293 (Bankr. W.D.N.Y. 2014) – Because a filed financing statement is seriously misleading, and therefore ineffective, only if a reasonably diligent searcher would be misled, a financing statement that ambiguously describes the collateral as “all assets, including [x, y, and z] now owned or hereafter acquired and located at [a specified place]” is not ineffective even if the collateral is located elsewhere. Moreover, in this case there was a long succession of filed financing statements that set forth the debtor’s name change, address change, and the change in the description of the collateral, so that no reasonably diligent searcher could not have been misled.
  • Jennings v. Shuler, 2014 Miss. App. LEXIS 55 (Miss. Ct. App. 2014) – Where an attorney prepares a security agreement but does not file a financing statement, the question of whether failure to file the financing statement constitutes malpractice is a question of fact not resolvable on summary judgment. No liability for attorney in this case, where damages not established and statute of limitations had run.
  • In re Residential Capital, LLC, 495 B.R. 250 (Bankr.SDNY 2013) – Reference to “excluded assets” in security agreement not clear as to whether particular assets become un-excluded once assets no longer fit the definition.

D. Perfection

1. Certificates of Title

  • In re Lloyd; Warfield v. Santander Consumer USA, Inc., 511 B.R. 657 (Bankr.D.Ariz., 2014) – Certificate of title application filed shortly after debtor filed for bankruptcy perfected the security interest; perfection related back prior to the perfection of the security interest.
  • Stanley Bank v. Parish, 317 P.3d 750, 298 Kan. 755 (Kan. 2014) – Examining competing liens in an automobile and the impact of the Kansas electronic certificate of the law.
  • Reinbold v. Wells Fargo Bank, N.A. (In re Palet Alvarado), 517 B.R. 880 (Bkrtcy. N.D. Ill. 2014) – Financing statement with errors and certificates of title.
  • In re Scott, 2014 WL 6871932 (Bankr. W.D. Mo. 2014) – Bank perfected its security interest in a vehicle when a new certificate of title noting the bank’s lien was issued. Because that was 36 days after the date the security interest attached, perfection did not relate back to the time of attachment under Mo. Rev. Stat. § 301.600(2) and was avoidable as a preference. The bank could have perfected earlier by filing a notice of lien, but submitting the title application did not substantially comply with that process because the application did not provide the requisite information and fee on the requisite form.
  • In re Alvarado, 517 B.R. 88
    0 (Bankr. C.D. Ill. 2014) – Secured party that was properly identified as lienholder on California certificate of title but that changed its name before the debtor moved and had the car re-titled in Illinois remained perfected even though the Illinois certificate used the former name of the secured party. The address listed for the secured party was correct and an inquiry directed to that address in the secured party’s former name would have enabled a reasonably diligent creditor to ascertain the correct information about the status of the lien.
  • In re Bryant, 2014 WL 6968066 (Bankr. W.D. Ky. 2014) – Lender had a perfected security interest in the debtor’s car even though the duplicate certificate of title erroneously listed the lender as a second lienholder rather than the only lienholder and even though because of space limitations it identified the lender as “Santander Consumer” rather than by its correct name, “Santander Consumer USA, Inc.”
  • Stanley Bank v. Parish, 317 P.3d 750 (Kan. 2014) – Bank perfected its security interest in vehicle by properly filing a filed a notice of security interest with the Kansas Department of Revenue, which maintained a record of the lien in its electronic database even though it later issued a certificate that omitted the lien. 2014 Commercial Law Developments Page 16
  • In re Thompson, 2014 WL 2919313 (Bankr. W.D. Mich. 2014) – Because Michigan law provides that a security interest in a motor vehicle is perfected upon receipt by the Secretary of State of a proper application for a certificate of title that identifies the security interest, not upon issuance of the certificate, the lender’s security interest in the debtor’s vehicle was perfected when the dealer submitted two conflicting applications for a certificate of title, one of which correctly identified the secured party as lienholder, even though the Secretary of State initially issued a certificate based on the other application that named a different entity as the lienholder.
  • In re Lozar, 2014 WL 910352 (Bankr. N.D. Ohio 2014) – Secured party with a security interest in a motorcycle perfected by notation on the certificate of title became unperfected when, upon receiving a check – later dishonored – for the secured obligation, it noted a lien release on the certificate and returned the certificate to the debtor.
  • In re Webb, 2014 WL 5472568 (Bankr. E.D. Ark. 2014) – Secured parties whose security interests were not noted on the certificates of title for the debtors’ vehicles were not perfected in the two trailers that qualified as vehicles under the state’s certificate of title statute even though no certificates of title for those trailers were admitted into evidence.
  • In re Keen, 2014 WL 6871867 (Bankr. W.D. Va. 2014) – Bank that had a security interest in numerous items of the individual debtor’s equipment to secure the debt owed by the individual’s business was not perfected in the motor vehicles, trailers or the boat listed because the only way to perfect the security interest in such items is to have the security interest noted on the certificate of title, and there was no evidence that the bank had done that.
  • Stanley Bank v. Parish, 317 P.3d 750 (Kan. 2014) – Bank whose security interest in a vehicle was perfected by compliance with the applicable certificate of title statute had priority over a buyer who purchased the vehicle from a subsequent judicial lien creditor after the state issued a certificate of title omitting reference to the lien. The buyer could not win under § 9-320(b) because compliance with the statute was the equivalent of filing a financing statement and the buyer could not win under § 9-337 because that provision applies only to a security interest perfected under another state’s law.
  • Mercedes-Benz Financial v. Powell, 2014 WL 3844013 (Mich. Ct. App. 2014) – The buyer who purchased a vehicle after a bank’s security interest in the vehicle was removed from the certificate of title with a forged release of lien could have taken free of the security interest if the buyer had no notice of any fraud or irregularity in the title and he paid valuable consideration for the vehicle, so as to qualify as a good faith purchaser.

2. Control

  • In re SGK Ventures, Inc., 2014 WL 5782994 (Bankr. N.D. Ill. 2014) – Debtor’s advance deposits for rent, utilities, legal services, and insurance were not deposit accounts because they were not maintained with a bank and thus control was not required to perfect a security interest in those deposits.
  • Zimmerling v. Affinity Financial Corp., 86 Mass.App.Ct. 136, 14 N.E.3d 325 (Mass. App. Ct. 2014) – Security interest attached to funds transferred to an escrow account; 9-332 did not cleanse the funds because the equitable interest of debtor remained.
  • In re Gem Refrigerator Co.; Seitz v. Republic First Bank, 512 BR 194 (Bankr. ED Pa. 2014) – This significant decision evaluates the definitions of securities account and deposit account, determining that the particular account at issue was a securities account with subaccounts. The court’s opinion offers a rare glimpse at how a court would evaluate relatively common account structures (although the conclusion is not free from doubt) and is an important reminder of the complexities of account collateral.
  • Del Moral v. UBS Financial Services Inc. of Puerto Rico, 2014 WL 6386964 (D.P.R. 2014) – Securities intermediary that, after being served with a writ of execution on behalf of a judgment creditor, liquidated the account and remitted a portion of the proceeds to a related party that had a security interest perfected by control and the remaining balance to the judgment creditor, was liable for the portion remitted to the secured party because the secured party never instructed the intermediary to pay it.
  • Terry Phillips Sales, Inc. v. SunTrust Bank, 2014 WL 670838 (E.D. Va. 2014) – Employee of bank that had a security interest in customer’s investment account did not commit conversion by waiting a day to release a hold on withdrawals because the security agreement expressly stated that no withdrawals were permitted without the bank’s prior written consent and thus there was not wrongful exercise or assumption of authority over the assets in the account.

3. Possession

  • In re Inofin, Inc., 512 B.R. 19 (Bankr. D. Mass. 2014) – Lender that financed the debtor’s purchase of installment sales contracts from car dealerships, and which had a security interest in the delivered contracts in its possession, but whose financing statement did not adequately describe the collateral, was perfected by possession of the installment contracts even though it did not possess the original Partial Purchase and Assignment that the debtor entered into with the dealerships because, without expert testimony as to how the business of purchasing and servicing sub-prime loans is documented, the trustee had failed to prove that the PPAs were the operative documents or part of the chattel paper.
  • In re GEM Refrigerator Co., 512 B.R. 194 (Bankr. E.D. Pa. 2014) – Bank with a security interest in the debtor’s investment account with a securities intermediary brokerage – as to which the bank both filed financing statements and entered into a control agreement with the intermediary – remained perfected when the assets credited to the account were transferred to three subaccounts at the same intermediary. The original investment account was investment property, not a deposit account, and the sub-accounts were also investment property even though they contained some cash. The financing statements covering “all investment property” were sufficient to perfect the security interest.
  • In re Jesup & Lamont, Inc., 507 B.R. 452 (Bankr. S.D.N.Y. 2014) – Bank that had a perfected security interest in deposited funds lost that
    interest when the funds were transferred to a second bank and then a third bank because control is required to perfect of security interest in a deposit account and the second and third banks took free of the security interest under § 9- 332(b). As a result, subsequent transfer of the funds to the original bank during the preference period was an avoidable preference.

4. Financing Statements: Debtor and Secured Party Name

  • In re Patriot Electric and Mechanical, Inc., 2014 WL 1761928 (Bankr. D. Md. 2014) – Whether the filed financing statement and continuation statements that listed the debtor’s original name – “Patriot Electric, Inc.” – but not the name the debtor adopted after the financing statement was filed – “Patriot Electric and Mechanical, Inc.” – and which were discoverable in response to a search against “patriotelectric” but not “patriotelectricmechanical” were effective to perfect was an issue that would be certified to the Maryland Court of Appeals.
  • In re Webb, 2014 WL 5472568 (Bankr. E.D. Ark. 2014) – Although joint venture by husband and wife was not a partnership, merely an agreement about how they would conduct their farming business together, and thus not a legal entity, the financing statements identifying the debtor as the venture were effective because the venture was an unregistered organization and describing such an organization by its name is not seriously misleading.
  • In re Patriot Electric and Mechanical, Inc., 2014 Bankr. Lexis 1962 (Bankr. D. Md. 2014) – Court certifies question regarding UCC financing statements and search logic to State Supreme Court; question involves state search logic that said “enter as much or as little of the debtor name: so long as you start at the beginning.” Filed financing statement had the beginning of the debtor name but failed to include entire debtor name, so filing will be found if partial name entered.

5. Filing of Financing Statement — Manner and Location

  • Sturtz Machinery, Inc. v. Dove’s Industries, Inc., 83 U.C.C. Rep. Serv. 2d 425 (N.D. Ohio 2014) – Lender perfected its security interest in the debtor’s fixtures by filing a financing statement in Pennsylvania, where the debtor was located, even though the fixtures were located in Virginia.
  • Clinton v. Adams, 2014 WL 6896021 (C.D. Cal. 2014) – Even if law firm had an Article 9 security interest in the debtor’s copyright infringement claim, that security interest was unperfected because the law firm filed a financing statement in California, where the infringement claim was prosecuted, rather than in Florida, where the debtor is located.
  • In re Eng, 83 U.C.C. Rep. Serv. 2d 500 (Bankr. E.D.N.C. 2014) – Recorded deed of trust served as an effective fixture filing because it stated that the “collateral is or includes fixtures . . . including but not limited to all heating, plumbing, ventilating, cooling, and lighting goods, equipment and other tangible and intangible property now or hereafter acquired, attached to or reasonably necessary to the use of such property.”

6. Amendments, Termination and Lapse of Financing Statement

  • In re Motors Liquidation Co., 755 F.3d 78 (2d Cir. 2014) – In connection with a case in which the debtor’s counsel filed termination statements for multiple secured transactions, only some of which were being refinanced, the court certified to the Delaware Supreme Court the question of whether a termination statement is authorized if the secured party of record reviewed and approved its filing or whether the secured party must also intend to terminate the security interest.2014 WL 5305937 (Del. 2014) – A termination statement is authorized by the secured party if the secured party of record reviewed and knowingly approved the termination statement for filing, regardless of whether the secured party subjectively intended or understood the effect of the filing.
  • Fjellin ex rel. Leonard Van Liew Living Trust v. Penning, 2014 WL 4298053 (D. Neb. 2014) – Termination statement filed without the knowledge or consent of the secured parties by the law firm representing the debtor was ineffective; the security interest remained perfected and continued to encumber the collateral, even after the debtor sold it.
  • United States v. Agra, 113 A.F.T.R.2d 2014-1896 (E.D. Cal. 2014) – Taxpayer had no basis for filing financing statements against two IRS employees and thus court could order that the financing statements be stricken from the filing office’s records and the taxpayer enjoined from filing any notices of nonconsensual liens, recording any documents, or otherwise taking any action in the public records which purports to name a federal officer as a debtor or encumber the rights or the property of any federal officer.
  • State v. Andrus, 2014 WL 3881553 (Ariz. Ct. App. 2014) – Individual who submitted for filing baseless financing statement against court clerk was guilty of one count of harassment of a public officer even though the filing office did not record or index the financing statement.
  • Nichols v. Branton, 2014 WL 4816075 (N.Y. Sup. Ct. 2014) – Judge presiding over an incarcerated defendant’s criminal trial was entitled, under the state’s non-uniform UCC § 9-518, to have the financing statement filed by the defendant against the judge expunged from the public record. The defendant was also liable for the costs incurred by the state attorney general’s office in responding to the defendant’s frivolous cross-motions.
  • United States v. Halajian, 2014 WL 4968287 (E.D. Cal. 2014) – Because the financing statement that an individual and corporation filed against a bankruptcy court clerk was baseless and false, the clerk was entitled to a declaratory judgment that the financing statement has no legal effect. Because the filing of the financing statement violates 18 U.S.C. § 1343, the clerk was also entitled to an injunction under 18 U.S.C. § 1345 prohibiting the individual and corporation from filing another financing statement against the clerk.
  • In re Motors Liquidation Co., 755 F.3d 78 (2d Cir. 2014), certified to Delaware Supreme Court. Delaware Supreme Court decision at 2014 Del. LEXIS 491 (Del. 2014) – Court evaluates whether proper authority existed for the filing of a UCC-3 termination statement; questions include the role of agency and whether authority requires an intent to file a particular termination statement or the intent to terminate an underlying lien.
  • In re Colony Beach and Tennis Club, Inc., 508 B.R. 468 (Bankr. M.D. Fla. 2014) – Post-petition lapse of financing statement did not cause the secured party to lose its lien or make the lien avoidable under Bankruptcy Code § 544(a) because lapse makes the security interest retroactively unperfected only against purchasers, not lien creditors.
  • In re Northern Beef Packers Ltd. Partnership Tax ID/EIN 26- 2530200, 83 U.C.C. Rep. Serv. 2d 104 (Bankr. D.S.D. 2014) – Even if equipment lessor had a blanket security interest in the debtor’s other assets, that security interest became unperfected when the lessor amended its financing statement to “restate” the collateral to consist only of the equipment covered now or in the future by a lease or security agreement between it and the debtor.
  • Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A., __ A.3d __ (Del.Sup. Ct. 2014) – ” the Second Circuit has asked us to assume that the secured party itself–JPMorgan– ‘review[ed] and knowingly approved for filing a UCC-3 purporting to extinguish the perfected security interest.’ for a termination statement to become effective under § 9-509 and thus to have the effect specified in § 9-513 of the Delaware UCC, it is enough that the secured party authorizes the filing to be made “.
  • Official Com
    mittee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A., __ F.3d __ (2nd Cir. 2015) – ‘From these facts it is clear that although JPMorgan never intended to terminate the Main Term Loan UCC-1, it authorized the filing of a UCC]3 termination statement that had that effect. “Actual authority is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.”

E. Priority

1. Lien Creditors

  • Farmers National Bank v. Green River Dairy, LLC, 318 P.3d 622 (Idaho 2014) – The statutory lien of agricultural commodity dealers who supplied feed for the maintenance of a debtor’s dairy cows did not extend to the livestock that consumed the encumbered feed, and thus a bank with a perfected security interest in the debtor’s cows was entitled to the proceeds from the sale of the cows.
  • In re Big Sky Farms Inc., 512 B.R. 212 (Bankr. N.D. Iowa 2014) – Feed supplier’s agricultural lien on the debtor’s hogs had priority over previously perfected security interest only for the price of the feed supplied with the 31 days preceding the supplier’s filings. In the absence of an agreement, payments to the supplier are credited to the oldest invoices first.
  • In re Schley, 509 B.R. 901 (Bankr. N.D. Iowa 2014) – Summary judgment denied on whether a feed supplier had an agricultural lien on the proceeds of the debtor’s pigs that was prior to the perfected security interests of two lenders because: (i) the debtor had pigs at different locations and it was unclear whether the pigs sold had consumed the feed supplied; (ii) priority applies only to the feed supplied with the 31 days preceding the supplier’s filings and it was unclear whether the payments made to the supplier paid for that feed. However, although Article 9 is silent on the issue, an Iowa agricultural lien does extend to proceeds of the collateral to which the lien attached.
  • J & M Cattle Co. v. Farmers National Bank, 330 P.3d 1048 (Idaho 2014) – The agister’s lien of company that provided food, care, and other services necessary to raise the debtor’s dairy cattle had priority over Bank’s previously perfected security interest in the cattle. Under § 9-333(b), a possessory lien, such as the agister’s lien in this case, has priority unless the statute creating the lien expressly provides otherwise. Although the statute specifies that proceeds of the cattle “must be applied to the discharge of any prior perfected security interest, the lien created by this section and costs; [and] the remainder, if any, must be paid over to the owner,” this language could be either a directive on priority or merely a list of the potential payees. Because it was ambiguous, the statute did not expressly give priority to the secured party.
  • In re Cam Trucking LLC, 84 U.C.C. Rep. Serv. 2d 588 (Bankr. D. Ariz. 2014) – Lender’s perfected security interest in vehicle had priority over later garagemen’s lien regardless of whether Arizona or Colorado law applies. Arizona’s § 9-333 gives priority to a possessory lien unless the statute creating it expressly provides otherwise and its garagemen’s lien statutes does expressly provide otherwise. Colorado’s non-uniform § 9- 333 gives priority to a garagemen’s lien only if the statute creating so provides and its garagemen’s lien statute does not so provide. Although the security interest was governed by Arizona law and the garagemen’s lien was created under Colorado law, the garageman could not combine the Arizona § 9-333 and the Colorado garagemen’s lien statute to obtain priority, particularly given that Colorado cases decided before the current version of Article 9 refused to accord a garagemen’s lien priority over a prior, perfected security interest.
  • In re Bissett Produce, Inc., 512 B.R. 528 (Bankr. E.D.N.C. 2014) – Grower that provided sweet potatoes to its own agent for storage, curing, packaging, and sale was not exempt from the PACA notice requirements and, because it did not comply with those requirements, was not entitled to the benefits of a PACA trust against either the agent or its secured lender.
  • Attorney’s Title Guaranty Fund, Inc. v. Town Bank, 850 N.W.2d 28 (Wis. 2014) – Lender with a perfected security interest in the proceeds of the debtor’s malpractice action, which attached upon settlement of the action, had priority over the rights of an earlier judgment creditor because even though the judgment creditor obtained a court order requiring the debtor to appear at supplemental proceedings, that did not give the creditor a judgment lien.
  • Heartland Bank & Trust Co. v. Leiter Group, 18 N.E.3d 558 (Ill. Ct. App. 2014) – Lender with a security interest in borrower’s equipment and accounts had a claim for conversion against the law firm that first deposited into its IOLTA account checks from the borrower’s customers and checks representing proceeds of the borrower’s equipment, and then used the IOLTA account to pay its fees. The law firm was not a holder in due course of the checks because it knew of the lender’s security interest. The law firm did not take free under § 9-332(b) because the deposit account was not the debtor’s, it was the law firm’s.
  • Zimmerling v. Affinity Financial Corp., 14 N.E.3d 325 (Mass. Ct. App. 2014) – Account debtor’s wire of funds to an escrow account pursuant to a court order in action brought by judgment creditor did not cause either the escrow agent of the judgment creditor to take free of the secured party’s perfected security interest under § 9-332(b), particularly given that the court order was intended to preserve the existing priorities.
  • Mishcon de Reya New York LLP v. Grail Semiconductor, Inc., 82 U.C.C. Rep. Serv. 2d 778 (S.D.N.Y. 2014) – The attachment lien that a law firm obtained on a client’s patent arose when the attachment order was entered, not when a receiver was later appointed, and thus had priority over a security interest in the patent that was created and perfected subsequently. The security interest was extinguished when the attachment lien was foreclosed at an auction sale at which the law firm was the highest bidder.
  • Blue Sky Telluride, LLC v. Intercontinental Jet Service Corp., 328 P.3d 1223 (Okla. Ct. App. 2014) – Summary judgment could not be awarded on secured party’s action to replevy aircraft from service company that had possession of and had made repairs to aircraft because, while it remained unclear if the service company had a possessory lien on the aircraft due to questions about whether it was authorized to make repairs, if it did have a lien, that lien has priority under § 9-333 over the secured party’s perfected security interest.
  • Tenet Health Care Sys. Hospitals Dallas, Inc. v. North Texas Hosp. Physicians Group, P.A., 438 S.W.3d 190 (Tex Ct. App. 2014) – Judgment creditor of tenant could garnish sublessee’s obligation to pay rent despite landlord’s security interest in the tenant’s accounts because the landlord never filed a financing statement to perfect its security interest and by serving the writ of garnishment the judgment creditor became a lien creditor.
  • ACF 2006 Corp. v. Merritt, 557 F. App’x 747 (10th Cir. 2014) – Lender with a perfected security interest in law firm’s accounts had priority in the firm’s share of the proceeds of a client’s tort claim settlement over those who had provided services in connection with the litigation and were still unpaid for their services, even if the service providers had a contractual lien on the settlement proceeds – a fact that had not proven – because there was no evidence that the lien was perfected. The service providers were not entitled to a constructive trust because the law firm did not unjustly acquire the funds nor was it inequitable for the lender to take priority. One dissenting judge conclu
    ded that the firm’s right to funds for expenses was not a right to payment for the firm’s services, and thus was not an account. Moreover, the firm had no right to reimbursement with respect to those funds because the firm had not paid the expenses. Thus, the dissenting judge would have ruled that the firm did not have a right to the portion of the settlement allocated to it for expenses, and therefore the lender’s security interest did not attach to that portion.
  • Blue Sky Telluride, L.L.C. v. Intercontinental Jet Service Corp, 328 P.3d 1223 (Okla. Ct. App. 2014) – Possessory statutory lien in aircraft trumped perfected security interest; case is an important reminder of the complexities of “hidden liens” and aircraft financing.
  • Associated Bank N.A. v. Collier, 2014 WI 62, 355 Wis.2d 343 (Wis. 2014) – Evaluating priorities between a judgment lien and perfected security interest.
  • In re Cam Trucking LLC, 2014 Bankr. LEXIS 3896 (Bankr.D.Ariz. 2014) – Court examines impact of conflicting statutory lien provisions in Arizona and California law. Court attempted to apply the purpose of the law.
  • Farmers Nat’l Bank v. Green River Dairy, LLC, 318 P.3d 622 (Idaho 2014) – Court interprets a state agricultural lien on “agricultural products and the proceeds of sale of agricultural products” as not creating a lien in cows that ate agricultural products. The case is an important reminder to look for state law hidden liens.
  • In re Elk Grove Village Petroleum, 510 B.R. 594 (Bkrtcy. N.D. Ill. 2014) – Evaluating priority of state tax liens.

2. Buyers and Other Transferees

  • Financial Federal Credit, Inc. v. Crane Consultants, LLC, 2014 WL 1883811 (W.D.N.Y. 2014) – Agreement providing for buyer of new crane to trade in an old crane to the seller was to be regarded as two independent transactions because neither was conditioned on the other, the buyer paid cash for the new crane while the seller provided a note for the old crane, the seller never paid any part of the price, and the buyer never delivered the old crane. The buyer was a buyer in ordinary course of business with respect to the new crane even though the buyer had the right to sell the new crane back to the seller for a specified price if the seller did not have possession of the old crane. Thus, the buyer took free of a perfected security interest in the new crane.
  • VW Credit, Inc. v. Robertson, 2014 WL 4207635 (E.D.N.Y. 2014) – Neither the lender with a security interest in a vehicle nor the buyers of the vehicle were entitled to summary judgment in the lender’s replevin action. Although the lender’s security interest was not perfected at the time of the sale to the buyers, factual issues remained as to whether the seller was authorized by the debtor to sell the vehicle and, even if so, whether the buyers acted in good faith given that the allegation that they paid substantially less than the value of the vehicle.
  • Chen v. New Trend Apparel, Inc., 8 F. Supp. 3d 406 (S.D.N.Y. 2014) – Buyers who purchased the debtor’s inventory at a liquidation sale at “closeout” prices did not qualify as buyers in ordinary course of business. The debtor’s desire to be paid exclusively in cash for large sums was a red flag obligating the buyers to investigate further into the ownership of the goods and their failure to do so prevented them from qualifying as buyers in ordinary course. However, the creditor with a perfected security interest in the goods purchased was not entitled to summary judgment on its conversion and replevin claims because it was unclear that it had made a demand for the goods.
  • Farmers-Merchants Bank & Trust Co. v. Southern Structures, LLC, 134 So. 3d 142 (La. Ct. App. 2014) – Sale of collateralized goods was made by the debtor, not the broker, and because it involved the debtor’s equipment, not inventory, the sale was not in ordinary course of business and the buyer did not take free of the perfected security interest.
  • Guaranty Bank & Trust Co. v. FGDI Division of Agrex, Inc., 2014 WL 1289466 (N.D. Miss. 2014) – Because two buyers of grain purchased not from a person engaged in farming operations, but from the farmer’s buyer, they took free of any security interest in the grain held by the farmer’s lender and thus the lender’s joinder of the subsequent buyers was without basis and would not be considered in determining whether there was diversity jurisdiction in the lender’s action against the initial buyer.
  • Financial Federal Credit, Inc. v. Crane Consultants, LLC, 2014 U.S. Dist. LEXIS 65125 (W.D.N.Y. 2014) – Court concludes buyer was a buyer in the ordinary course in spite of trade in and buyback provisions in the sale agreement that competing secured creditor argued could not be in the ordinary course.
  • In re Provider Meds, LP, 2014 WL 4162870 (Bankr. N.D. Tex. 2014) – Secured party with a security interest in the debtor’s IP, including source code, was not entitled to rescind or terminate the debtor’s licenses of the source code even though the licenses were allegedly perpetual, royalty-free, and permitted the licensees to modify the code, thus greatly reducing the code’s value as collateral. The secured party had no claim for fraudulent inducement because the debtor made no false representation to the secured party (the term sheet contained no representations and the separate purchase and sale agreement, which did contain representations, related only to the debtor’s patents and patent-related rights), the debtor’s promise to provide a “senior security interest” was not breached by the license, and in any event a valid fraudulent inducement claim would not warrant rescission of the licenses, at most it might lead to rescission of the secured party’s contracts with the debtor. Even if the license agreements were executed after the security agreement, and backdated to before the before the date of the security agreement, that does not render them fraudulent or forgeries. The signatories had authority to act and their signatures were authentic. The licensee were not liable for tortious interference with contract because even though the licensees might have known that the secured party’s consent was needed to encumber the source code, the licenses were not an encumbrance.
  • Farm Credit Services of America, PCA v. Cargill, Inc., 750 F.3d 965 (8th Cir. 2014) – Secured party with a perfected security interest in a farmer’s corn crop, and which filed in compliance with the Food Security Act, had priority in the corn over the buyer to whom the corn had been delivered – and was entitled to possession thereof – even though the buyer had setoff rights against the debtor and defenses to payment under § 9-404. Section 9-404 was irrelevant to the parties’ relative interests in the corn.
  • Farmers-Merchants Bank & Trust Co. v. Southern Structures, LLC, 134 So. 3d 142(La. Ct. App. 2014) – Because the buyer of equipment had knowledge of the perfected security interest in the equipment, knew that the security agreement required the secured party’s consent to a sale, and knew that the seller was either out of business or going out of business, the buyer did not act in good faith for the purposes of a non-uniform Louisiana rule that exempts a good faith buyer of collateral from personal liability.
  • Wise v. SR Dallas, LLC, 436 S.W.3d 402 (Tex. Ct. App. 2014) – There was no basis for the jury’s finding that the buyer of the debtor’s furniture, fixtures, and equipment was liable in conversion to the secured party because there was no proof that the secured party made a demand for the property. Even if the buyer was liable, the jury erred in awarding damages equal to the amount of the debt owed to the secured party rather than the value of the property at the time of the alleged conversion, as to which no evidence was presented.

3. Statutory Liens; Forfeiture

  • Farmers-Merchants Bank & Trust Co. v. Southern Structures, LLC., 134 So.3d 142 (La. App. 2014) – Third party purchaser of collateral could be held personally liable under 9-315 where it acted in bad faith; court notes conspiracy with debtor is not required under current La 9-315. Court seems to muddle some of its security interest analysis, including citing cases from 1940 and 1963 in struggling to determine the validity of a security interest in movable goods.

4. Subordination and Subrogation

5. Equitable Claims

  • Robertson v. Robertson, 2014 WL 6610040 (N.Y. Sup. Ct. 2014) – Individual who received specific bequest of stock from his mother, who had pledged the stock to secure a debt guaranteed by the individual’s brother, was subrogated to the secured party’s rights against the brother when the executor of the mother’s estate allowed the stock to be sold to satisfy the debt to the secured party.

6. Set Off

  • InfinaQuest, LLC v. DirectBuy, Inc., 83 U.C.C. Rep. Serv. 2d 549 (N.D. Ind. 2014) – Even if lender’s security interest in the debtor’s accounts was perfected by the financing statement filed by the lender’s affiliate, which also had a security interest, the lender had no claim against either the debtor’s franchisor or another financier whose contracts with the debtor expressly gave the franchisor and financier setoff rights. The franchisor and financier were “account debtors” to the extent they owed contractual obligations to the debtor and the lender was an “assignee” whose rights were, pursuant to § 9-404(a), subject to all the terms in the agreements between the debtor and the account debtors.
  • Catskill Hudson Bank v. A & J Hometown Oil, Inc., 982 N.Y.S.2d 592 (N.Y. App. Div. 2014) – Buyer of debtor’s oil business – other than existing accounts – that received instruction to pay secured party all collections on accounts generated before the sale and knew of the debtor’s promise not to modify the purchase agreement without the secured party’s consent could setoff overpayment of purchase price against its obligation to pay future gallonage fees but not against its collections of presale accounts, which it did not acquire.
  • Colony Flooring & Design, Inc. v. Regions Bank, 2014 WL 2021823 (Tex. Ct. App. 2014) – Account debtor submitted sufficient evidence of uncredited returns and setoff rights to avoid summary judgment in the secured party’s action to collect the account.

7. Priority — Competing Security Interests

  • Feresi v. The Livery, LLC, 2014 WL 7021107 (Cal. Ct. App. 2014) – Perfected security interest of the manager of an LLC in the debtor’s membership interest in the LLC was equitably subordinated to the previously created but unperfected security interest of the debtor’s ex-wife, who was also a member of the LLC, because the manager breached his LLC fiduciary duty to the ex-wife by destroying the value of her security interest. The manager, knowing of the ex-wife’s security interest and that the debtor was in default on his obligations to his ex-wife, loaned money to the debtor, created a conflicting security interest, and then surreptitiously perfected it to gain an advantage over the ex-wife.
  • Sturtz Machinery, Inc. v. Dove’s Industries, Inc., 83 U.C.C. Rep. Serv. 2d 425 (N.D. Ohio 2014) – Lender perfected its security interest in the debtor’s fixtures by filing a financing statement in Pennsylvania, where the debtor was located, even though the fixtures were located in Virginia. The lender’s security interest had priority over the seller’s security interest that was later perfected by a fixture filing in Virginia, almost a year after delivery of the goods to the debtor.
  • Colbert v. First NBC Bank, 2014 WL 1329834 (E.D. La. 2014) – The debtor was not a necessary party in one secured creditor’s declaratory judgment action against another secured party to determine the validity and priority of the latter’s security interest in a commercial tort claim.
  • Sturtz Machinery, Inc. v. Dove’s Industry, Inc., 2014 U.S. Dist. LEXIS 49235 (N.D. Ohio 2014) – Prior filing in office of secretary of state of debtor’s location trumped subsequent fixture filing in location of fixture collateral; case is a helpful application of fixture filing priority rules and rightly acknowledges there are two effective ways to perfect a UCC security interest in fixtures by filing.
  • In re Brady, 508 B.R. 736 (Bankr.E.D.Wash. 2014) – Court rejected debtor’s reaffirmation agreement under Section 524(c) as not in the best interests of debtor.
  • Amegy Bank v. DB Private Wealth Mortgage, Ltd., 2014 WL 791503 (M.D. Fla. 2014) – Secured party with a perfected security interest in corporate stock that the debtor then sold and placed in a deposit account was not entitled to summary judgment against another bank that received some the sale proceeds on the basis that the recipient acted in collusion with the debtor to violate the secured party’s rights. The evidence of collusion was circumstantial and did not eliminate all material factual disputes.
  • Heartland Bank & Trust Co. v. Leiter Group, 18 N.E. 3d 558 (Ill.App.3d 2014) – Law firm converted checks subject to competing security interest when it deposited the checks to its IOLTA account.
  • Prairie State Bank & Trust v. Deere Park Associates, 84 U.C.C. Rep. Serv. 2d 644 (Ill. Ct. App. 2014) – Bank with a perfected security interest in debtor’s inventory and proceeds had no conversion claim against subsequent lender that, in facilitating the debtor’s liquidation sales, retained commissions, paid itself, and paid unsecured creditors because the bank had waived its security interest during the course of its relationship with the debtor by making loans without sufficient inventory collateral, renewing at least one of the loans when it knew of the going-out-ofbusiness and inventory-reduction sales, failing to require the debtor to keep its business accounts on deposit with the secured party, failing to communicate with the defendant after receiving its purchase-money notice and obtaining knowledge of the sales, failing to take any action other than “rolling over notes” after the debtor issued bad checks, and failing to obtain recent income and asset statements from the debtor.

8. Purchase-Money Security Interests

  • Financial Federal Credit, Inc. v. Crane Consultants, LLC, 2014 WL 1883811 (W.D.N.Y. 2014) – Agreement providing for buyer of new crane to trade in an old crane to the seller was to be regarded as two independent transactions because neither was conditioned on the other, the buyer paid cash for the new crane while the seller provided a note for the old crane, the seller never paid any part of the price, and the buyer never delivered the old crane. The seller’s secured party was also not entitled to the old crane because the trade-in was never consummated and thus the seller never acquired ownership rights in the old crane. Even if the seller did acquire rights in the old crane without possession, the buyer’s retained PMSI in the old crane had priority over the security interest of the seller’s secured party either under § 9-324(a), because the old crane never became inventory of the seller, or under § 9-324(b), because the notification requirement of § 9-324(b) never applied.
  • In re Brady, 508 B.R. 736 (Bankr. E.D. Wash. 2014) – Because § 9- 335(d) made a tire seller’s purchase-money security interest in tires sold to individual subordinate to another lender’s perfected security interest in the debtor’s car, pursuant to § 9- 335(e) the tire seller did not have a right to repossess the tires and thus the debtor’s reaffirmation agreement with the seller would not be approved.
  • T. Gluck & Co., Inc. v. Craig Drake Manufacturing (NY Sup. Ct 2013) – PMSI secured party did not
    renew PMSI notice to existing inventory lender and did not have PMSI priority for new shipments.

9. Proceeds

  • 1st Source Bank v. Wilson Bank & Trust, 735 F.3d 500 (6th Cir. 2013) -Accounts are not ‘proceeds’ of rigs used to generate accounts.
  • BOKF, N.A. v JPMorgan Chase Bank, N.A. (In re MPM Silicones, LLC), 518 B.R. 740, 2014 Bankr. LEXIS 4353 (Bankr SDNY 2014) – Amounts distributed to secured party pursuant to Chapter 11 plan are not Article 9 “proceeds” of collateral held by secured party.

F. Default and Foreclosure

1. Default

  • GMAC v. Everett Chevrolet, Inc., 317 P.3d 1074 (Wash. Ct. App. 2014) – Security agreement between car dealership and floor plan financier that provided that the secured obligation was due “on demand” was a demand obligation even though another provision required faithful and prompt payment after a sale of each vehicle and even though there was no secured obligation when the dealership executed the agreement. Because the secured obligation was due on demand, the secured party had no duty of good faith to avoid exercising the right to demand payment.
  • Trejo de Zamora v. Auto Gallery, Inc., 2014 WL 1685925 (D. Nev. 2014) – Because the seller of a vehicle violated the Nevada Retail Installment Sales Act, and was therefore not permitted to recover any finance charge or fees, the buyer could not have been in default when repossession occurred and thus had a valid claim for conversion.
  • TTO Drilling Co. v. Hopkinson, 2014 WL 5314770 (S.D.N.Y. 2014) – Secured party with a security interest in promissory notes had no right to collect them absent some default by the debtor.
  • Moniuszko v. Karuntzos, 2014 WL 4657134 (Ill. Ct. App. 2014) – Because the parties’ lease agreement expressly required the landlord to release its security interest in the tenant’s equipment on a specified date unless, prior to that date, the tenant “was found to be in default of this Lease and failed to cure such default,” and the landlord had not obtained by the specified date a court ruling that the tenant was in default, the landlord was required to release its security interest. It did not matter that the security agreement permitted the landlord to declare a default in its sole discretion because such language was conspicuously absent from the lease.
  • Bayader Fooder Trading, LLC v. Wright, 2014 WL 5369420 (W.D. Tenn. 2014) – Buyer of alfalfa hay that had security interest in farmer’s equipment to secure farmer’s obligations under the sales agreement was entitled to emergency order for immediate possession of the collateral because the farmer had failed to deliver the hay by the date provided for in their contract and was not entitled to a defense based on the force majeure clause because the weather conditions were not significantly impacting other nearby growers and were not so severe as to be unforeseeable and the farmer did not take action to mitigate the effects of the poor weather conditions.
  • RTP LLC v. Orix Real Estate Capital, Inc., 2014 U.S. Dist. LEXIS 12454 (N.D. Ill. 2014) – SPE real estate borrower; evaluates whether various defaults occurred.
  • Spellman v. Independent Bankers’ Bank of Florida, 2014 WL 3871264 (Fla. Ct. App. 2014) – Bank that, after default, had the collateralized shares of stock reissued in the name of the bank’s subsidiary and then tried but failed to sell the stock at a public sale was entitled to a judgment against the debtor for the full amount of the secured obligation. A secured party does not dispose of the collateral merely by having it re-titled in its own name and there is no reason not to apply that rule to a re-titling in a subsidiary’s name.

2. Repossession of Collateral

  • Duke v. Garcia, 2014 WL 1318646 (D.N.M. 2014) – Repossession agent intentionally trespassed on the debtor’s property and violated § 9-609 by remaining on the property and continuing repossession efforts after the debtor repeatedly protested and a physical altercation between the agent and the debtor occurred. The repossession agent also violated the state UDAP law by falsely representing, though its actions, that it was entitled to proceed with repossession on the debtor’s property, over her protest, and with police assistance.
  • Duke v. Garcia, 2014 WL 1333182 (D.N.M. 2014) – While officers involved in repossession that breached the peace might be liable for damages under § 1983, the junior officer was not liable for punitive damages given his limited involvement in and lack of control during the incident.
  • Thompson-Young v. Wells Fargo Dealer Services, Inc., 84 U.C.C Rep. Serv. 2d 200 (Ill. Ct. App. 2014) – Debtors’ failed to raise a claim for breach of the peace by alleging that: (i) two repossession agents came to their apartment building at 4:00 a.m.; (ii) one remained outside the building ringing their buzzer and the other went inside and “banged loudly” on their apartment door for an “extended” period of time; (iii) they “yelled loudly” and identified themselves as agents there to repossess the car; and (iv) they put a club on the car, left, and returned later and repossessed the car.
  • Davis v. Toyota Motor Credit, 2014 WL 1653230 (S.D. Tex. 2014) – Summary judgment denied on debtor’s claim for damages resulting from repossession that allegedly resulted in a breach of the peace when the debtor tried to access the trunk of her vehicle as the repossession agent was hooking the car up to the tow truck, causing her to be lifted up with the car, and then injuring her ankle when she jumped down.
  • Aviles v. Wayside Auto Body, Inc., 2014 WL 4932993 (D. Conn. 2014) – Summary judgment denied on whether secured party and its repossession agent breached the peace in repossessing the debtor’s vehicle over the debtor’s oral protects, even though there was no physical contact, the police were not called, the agent did not use trickery, and the debtor was permitted to remove his personal belongings.
  • Golden v. Prosser, 2014 WL 4626489 (D. Minn. 2014) – Debtor had no cause of action under § 9-609 for secured party’s letter threatening repossession because repossession never occurred.
  • Goldenstein v. Repossessors, Inc., 2014 WL 3535112 (E.D. Pa. 2014) – Debtor had no cause of action under either the Fair Debt Collection Practices Act or RICO against company that repossessed her vehicle, even if the secured loan was usurious, because the security interest was nevertheless enforceable and the debtor was in default. The debtor’s redemption of the vehicle by paying the usurious interest was not actionable because it was voluntary.
  • Binion v. Fletcher Jones of Chi., LTD., LLC, Ill. App. Unpub. LEXIS 1369 (Ill. App. 1st 2014) – Court concludes embarrassing conduct by independent agent of SP did not constitute breach of peace.
  • Thompson-Young v. Wells Fargo Dealer Servs., Inc., 2014 Ill. App. Unpub. 1610) (Ill. App. 1st 2014) – No breach of peace in repossession even though auction house employees caused a noisy scene by knocking on debtor’s door at 4 AM.
  • Duke v. Garcia, 2014 WL 1333182 (D.N.M. 2014) – Because there was sufficient evidence for the debtor’s claim for punitive damages against the repossession agent to survive a motion for summary judgment, the debtor’s claim for such damages against the secured party also survived, even though the secured party might not have known of or ratified the agent’s wrongful conduct.
  • Duke v. Garcia, 2014 WL 1318647 (D.N.M. 2014) – Secured party’s text messages to the debtor prior to repossession violated the state UDAP law by falsely representing that it had filed a warrant for the debtor’s arrest. The secured party might also have violated the act by failing for four months to notify the debtor of the surplus resulting
    from its disposition of the collateral. The secured party violated § 9-615 by failing to pay the entire amount of the surplus. The secured party violated § 9-616 by sending an explanation of the surplus that did not substantially comply with the requirements. Finally, because the duty not to breach the peace during repossession is nondelegable, the secured party was liable for the repossession agent’s breach of the peace.
  • Irwin v. West Gate Bank, 848 N.W.2d 605 (Neb. 2014) – Because the secured party had a right but no duty to take possession of the collateral, there was no consideration for the secured party’s abandonment of the debtor’s collateral to the debtor’s landlord and thus the secured party could not be liable for breach of the abandonment agreement by asserting its rights in the collateral and receiving payment in the debtor’s bankruptcy.
  • Dove East Estates v. Green Tree Servicing, LLC, 2014 WL 4050591 (Del. Ct. Com. Pl. 2014) – Secured party that had a right to repossess the debtor’s manufactured home but never did, and that never promised the landlord to pay storage fees, was not liable for those fees even if the secured party entered the premises to post a for sale sign.
  • Idaho Property Management Services, Inc. v. Macdonald, 2014 WL 7096454 (Idaho Ct. App. 2014) – Individual who had a security interest in the debtors’ abandoned mobile home was not liable for rent damages to the owner of the lot on which the mobile home was situated. Although the individual was listed as the “legal owner” on the certificate of title, under the labels used by the Idaho Department of Transportation, that simply meant that the individual was a lienor, and thus could not be liable for trespass. Although a state statute does impose liability for rent on lienors, the landlord had not complied with the notification requirements of that statute.
  • Allen v. Continental Western Ins. Co., 436 S.W.3d 548 (Mo. 2014) – Secured party had no cause of action against its liability insurer for failing to defend it against claim for wrongful repossession because the insurance policy excluded “property damage expected or intended from the standpoint of the insured” and although the insured may have been mistaken about the right to repossess, its actions were intentional.
  • Peterson v. Northern Gaul Properties, Inc., 2014 WL 2921956 (Minn. Ct. App. 2014) – Individual who came into possession of real property on which the debtor had stored his RV to avoid repossession, and who investigated the ownership of the RV, learned of the secured party’s pending replevin action, and surrendered possession of the vehicle to the secured party, was not liable to the debtor for conversion because the debtor was not the lawful possessor of the vehicle.

3. Notice of Foreclosure Sale

  • In re Inofin, Inc., 512 B.R. 19 (Bankr. D. Mass. 2014) – Secured party did not provide reasonable notification of its disposition of chattel paper because it sent notifications for three different dates and never informed any of the debtor’s creditors with financing statements on file that the first notification was erroneous or that the last superseded the prior notifications.
  • TCFIF Inventory Finance, Inc. v. Appliance Distributors, Inc., 82 U.C.C. Rep. Serv. 2d 836 (N.D. Ill. 2014) – Clause in guaranty agreement providing that “[a]ny notice of a disposition [of collateral] shall be deemed reasonably and properly given if given to the Guarantor at least 10 days before such disposition” did not impose an affirmative requirement on the creditor but merely provide a guideline for the reasonableness of notice required by the UCC. Hence, the creditor’s failure to provide the guarantors with notice was not a breach of the guaranty. Although the failure to provide notice did result in a rebuttable presumption that there was no deficiency, the creditor rebutted the presumption by showing that most of the collateral was sold back to the manufacturer pursuant to repurchase agreements, the guaranty agreement declared that to be a commercially reasonable disposition, and the bulk of the secured obligation related to inventory that was apparently sold out of trust and hence never disposed of by the creditor.
  • Wells Fargo Bank v. Witt, 2014 WL 1373633 (N.D. Ala. 2014) – Because the debtor – not the secured party – sold the collateral, the secured party had no duty to provide notice of the sale to the guarantor and the requirement that the sale be conducted in a commercially reasonable manner did not apply.
  • In re ProvideRx of Grapevine, LLC, 507 B.R. 132 (Bankr. N.D. Tex. 2014) – Secured party’s notification of disposition that referred only to the debtor’s patent and patent-related rights must be read together with the letter accompanying the notification that referred to all the collateral, and thus the secured party disposed of all of the debtor’s IP assets, not merely the patent and patent-related rights as to which the security interest was perfected. Even if the notification was deficient, that did not invalidate the sale or render it voidable.
  • Newman v. Federal Nat’l Mort. Ass’n, 2014 WL 7334192 (N.Y. Sup. Ct. 2014) – Because compliance with the non-uniform New York rule requiring notification 90 days in advance of a disposition of shares in a residential cooperative apartment is a condition to having an effective sale, secured party that purchased the shares at a disposition conducted without the proper notification would be enjoined from bringing an eviction action against the debtor.
  • John Deere Construction & Forestry Co. v. Parham, 755 S.E.2d 825 (Ga. Ct. App. 2014) – Secured party that repossessed and sold farm equipment was entitled to a deficiency judgment because it complied with the notification rules of § 9-613. Although the secured party did not, pursuant to the Georgia Retail Installment Act, provide pre-sale notification of its intent to seek a deficiency, that act applies only to collateral purchased for personal, family, or household use and thus was inapplicable.
  • Gardner Ally Financial, Inc., 61 A.3d 817 (Md. 2013) – Discusses meaning of when the secured party conducts a “public” or “private” foreclosure sale.

4. Commercial Reasonableness of Foreclosure Sale

  • In re Adobe Trucking, Inc., 551 F. App’x 167 (5th Cir. 2014) – Bankruptcy court did not err in concluding that a public sale of collateralized drilling equipment, at which the secured party made the winning bid of $41 million, was commercially reasonable given that the price was higher than the amount of one appraisal, the other appraisal had to be discounted because it was prepared well before the market for such equipment was declined, and the secured party resold the equipment four months later for only $10 million. Advertising for the sale for one day in newspapers of general circulation was adequate because the security agreement provided that it would not be commercially unreasonable “to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature.” The debtors could not complain about the secured party’s failure to clean or paint the equipment prior to the sale or make it available for inspection given their refusal to turn the collateral over, identify its location, otherwise cooperate and because the security agreement provided that the secure party need not prepare the collateral for sale or have possession at the time of sale.
  • Keybank v. Hartmann, 82 U.C.C. Rep. Serv. 2d 730 (E.D. Ky. 2014) – Private sale of encumbered boats that the secured party conducted through a broker, as the debtor suggested and later admitted would be commercially reasonable, merely with a different broker and for a higher price, was commercially reasonable.
  • GECC v. FPL Service Corp., 995 F. Supp. 2d 935 (N.
    D. Iowa 2014) – Secured party proved that it conducted a commercially reasonable disposition of the collateral – two copiers – by showing that: (i) it hired a remarking firm that emailed approximately 2500 potential buyers, which the firm had identified from past transactions and marketing efforts as those that customarily purchase this type of equipment for parts; (ii) the firm sold the copiers to the highest bidder; and (iii) this process conforms to that used by copier dealers who wish to maximize the price of used copiers.
  • Builders Development & Finance, Inc. v. Vern Reynolds Construction Company, Inc., 2014 WL 1875804 (Minn. Ct. App. 2014) – Trial court did not err in concluding that judicially approved sale of a minority interest in a limited liability company was commercially reasonable. The secured party did not procure the ruling through fraud merely because the secured party’s appraiser misstated some facts and other appraisers disagreed with his methodology. The trial court did err in refusing to award the secured party the attorney’s fees it incurred post-judgment in defending the sale because the promissory note expressly provided for attorney’s fees “incurred in protecting or preserving the security.”
  • Jack in the Box, Inc. v. Mehta, 2014 WL 2069530 (N.D. Cal. 2014) – Franchisor, in an action for breach against the franchisee, was entitled to an order authorizing the sale of the franchisee’s collateralized equipment by the franchisee’s secured party to the franchisor. The sale was negotiated at arms length and thus was commercially reasonable.
  • In re Sandpoint Cattle Co., 83 U.C.C. Rep. Serv. 2d 863 (D. Neb. 2014) – Secured party with a security interest in cattle gave the debtor a fair credit of $95,000 on the secured obligation for the 38 cattle he did not sell but simply retained. The secured party conducted a commercially reasonable disposition of 167 heifers because the evidence showed that these were the poorest quality of the abandoned cattle and the marginal increase in price that might have resulted from keeping and calving the heifers would not outweigh the increased costs of feeding and sheltering the animals. The secured party conducted a commercially reasonable public disposition of 509 cattle even though there was minimal advertising – some personal phone calls and online ads – and the sale was conducted at a commercial beef barn, not a registered Angus sale barn because the debtor insisted that the secured take possession on short notice and there were few or no other viable options for where to take the cattle and sell them from. The secured party’s later sale of cattle at an annual bull sale was also commercially reasonable; the secured party had no duty to delay the sale in the hope that the collateral’s value would rise. The secured party’s final sale of 1210 cattle at a public sale was commercially reasonable even though made in December, at a barn predominantly used to auction commercial beef cattle, not purebred Angus, and advertised for only four months. The cattle were sold for more than their appraised value, the secured party had no duty to delay the sale, and the sale was on a recognized market.
  • Harley-Davidson Credit Corp. v. Galvin, 2014 WL 4384632 (D.N.H. 2014) – The guarantor of an airplane loan failed to raise a factual issue about the secured party’s disposition of the collateral to avoid summary judgment on the secured party’s claim for a deficiency. Even if the guarantor was correct in asserting that the airplane was missing components at the time of sale and this could have affected the sales price, he did not properly supported that contention. There was no evidence that the secured party’s agent concealed the vandalism of the airplane from the guarantor or that knowledge of the vandalism would have changed the sale price. At its core, the guarantor’s complaint was with the sale price, but there was no evidence that the sale process was commercially unreasonable.
  • FL Receivables Trust 2002-A v. Arizona Mills, LLC, 82 U.C.C. Rep. Serv. 2d 764 (Ariz. Ct. App. 2014) – Creditor with a security interest in a restaurant building and fixtures that was contractually superior to the interest of the landlord lost its lien when it failed within a commercially reasonable time to find a suitable new tenant. The length of time between repossession and disposition is a factor in determining whether the disposition is commercially reasonable under § 9-610.
  • Provident Bank v. Steele, 83 U.C.C. Rep. Serv. 2d 433 (S.D. Tex. 2014) – Debtor raised a colorable claim that the bank, which spent more than $50,000 to tow and repossess a boat that the bank sold for only $16,000, either incurred unreasonable expenses or conducted the sale in a commercially unreasonable manner.
  • Ross v. Rothstein, 2014 WL 1385128 (D. Kan. 2014) – Summary judgment denied on the commercial reasonableness of the secured party’s sale of stock on the OTCQB market because factual disputes about how that exchange operates left unresolved whether it qualifies as a “recognized market” under § 9-627.
  • TAP Holdings, LLC v. Orix Finance Corp., 2014 WL 5900923 (N.Y. Sup. Ct. 2014) – Debtor’s creditors raised a claim that the senior lenders failed to act in good faith by taking control of the debtor’s board, acquiring all of the debtor’s assets in satisfaction of the secured obligation, and then transferring those assets to a newly formed entity, all in a very quick process without involvement of the junior creditors or equity holders and without competitive dynamic.
  • Kinzel v. Bank of America, 2014 WL 346293 (N.D. Ohio 2014) – Disputes about material facts prevented summary judgment on whether the secured party breached the duty of good faith in liquidating the shares of stock in which it had a security interest. While the secured party liquidated the stock after it fell below the designated floor price, on several prior occasions when the collateral fell below the designated floor price the secured party reduced the loan to maintenance ratio, accepted cash payments and collateral, and most importantly, adjusted the floor price, and yet the secured party offered no explanation of why on this occasion it liquidated the collateral. Moreover, the secured party had not shown that it acted reasonably in concluding that all the pledged collateral was insufficient to support the loan solely because the share price of this stock fell. The debtors, who had not bargained for an express restriction on the secured party’s discretion, had not shown as a matter of law that the secured party acted unreasonably in refusing to make further accommodations before liquidating the collateral.
  • In re Inofin, Inc., 512 B.R. 19 (Bankr. D. Mass. 2014) – Secured party did not conduct a commercially reasonable sale of chattel paper because it made no reasonable efforts to market the loan portfolio, it provided limited and conflicting notification of the sales, the auctioneer made no effort to solicit bids from individuals or entities in the industry by placing ads in trade publications and instead merely placed ads in the Boston Herald, which resulted in insignificant interest and a single bid from the secured party. However, this did not render the sale void and the debtor’s bankruptcy trustee failed to prove that any damages resulted.
  • Adobe Trucking, Inc. v. PNC Bank (In re Adobe Trucking, Inc.), 551 Fed. Appx. 167 (5th Cir. 2014) – Fifth Circuit upholds lower court determination that foreclosure sale of drilling rigs was commercially reasonable. Courts looked to “proceeds” test, giving deference to agreed upon foreclosure procedures contained in the original credit agreement.
  • GECC v. FPL Service Corp., 2014 WL 360114 (N.D. Iowa 2014) – Equipment lessor in a transaction that was really a sale with a retained security interest failed to send the debtor notification of the second disposition of equipment and thus there was a pre
    sumption that no deficiency was owing. However, the lessor rebutted that presumption by showing that the sale was conducted in a commercially reasonable manner and at the same price as the first sale, for which the lessor had sent notification to the debtor.
  • Topek, LLC v. W.H. Silverstein, Inc., 2014 WL 1124311 (D.N.H. 2014) – Entity that bought from a secured party virtually all of the assets of a builder of custom-designed post and beam homes, including the builder’s intellectual property, trade names, design templates, and goodwill, and then hired most of the builder’s employees, probably had the right to hold itself as the builder. Thus, another entity that had hoped to acquire the assets had no likelihood of success in its action against the buyer for a false advertising claim under either the Lanham Act or the New Hampshire Consumer Protection Act.

5. Effect of Failure to Give Notice, Conduct Commercially Reasonable Foreclosure Sale, or Otherwise Comply with Part 6 of Article 9

  • EBC Asset Investment, Inc. v. Sullivan Auctioneers, LLC, 2014 WL 675512 (C.D. Ill. 2014), 2014 WL 903955 (C.D. Ill. 2014) – Secured party’s claim for conversion against auction house that sold encumbered farming equipment on behalf of the debtors and without the secured party’s permission was subject to the fiveyear limitations period for conversion, not the three-year period under § 3-118 for conversion of an instrument.
  • Mahanna v. U.S. Bank, 747 F.3d 998 (8th Cir. 2014) – Debtors who in 1986 gave possession of gold coins to a bank to secure a loan from the bank and who in 1997, after a series of bank mergers, began inquiring as to the location of the coins, was on notice at least by 2001 that the bank’s successor could not locate the coins and thus the debtors’ 2011 action against the successor was barred by the 10-year statute of limitations.
  • Huffman v. Credit Union of Texas, 758 F.3d 963 (8th Cir. 2014) – Debtor’s action for failure to send the proper notification of disposition under § 9-614 was barred by either the Missouri 5- year limitations period for actions created by statute other than for a penalty or by the 3-year limitations period for statutory penalties. The 6-year limitations period for actions against a moneyed corporation was not applicable.
  • SECC v. Deer Valley Trucking, Inc., 2014 WL 6686731 (D.N.D. 2014) – Secured party with a security interest in mobile tankertrailers was entitled to an order, without prior notice to the debtor, temporarily restraining the debtor from moving, sequestering, or using collateral. The secured party had demonstrated a strong likelihood of success on the merits based on the debtor’s default, a threat of irreparable harm given the potential for depreciation and deterioration that will occur with continued use of the collateral coupled with the debtor’s likely inability to satisfy a money judgment, and while the debtor might suffer some harm to its business operations, it was a harm that was bargained for in the loan documents.
  • Flanders Corp. v. EMI Filtration Products LLC, 2014 WL 1608359 (E.D.N.C. 2014) – Secured party that had provided evidence of default by debtors who were no longer represented by counsel in the case and who had not filed responsive pleadings was entitled to a preliminary injunction enjoining the debtors from disposing of any of the collateral and from withholding the collateral from the secured party. The secured party was required to post a nominal bond of only $1,000.
  • 395 Lampe, LLC v. Kawish, LLC, 2014 WL 221814 (W.D. Wash. 2014) – A secured party with a security interest in the debtor’s one-third ownership of an LLC did not, merely by transferring to itself after default title to that ownership interest, effect a disposition or an acceptance of the collateral. There was no disposition because a secured party cannot buy at a private sale and there was no public sale. There was no acceptance because there was no proposal therefor and the debtor had objected. As a result, there was no reason to determine the value of the LLC interest to determine what deficiency or surplus existed.
  • Jode Investments LLC v. Burning Tree Properties, LLC, 2014 WL 1515267 (Mich. Ct. App. 2014) – Entity formed by some guarantors and which claimed to have acquired the debtor’s personal property collateral in a disposition conducted by the secured party had not in fact done so because the documents indicated merely that, in return for payment, the secured party: (i) would transfer the real property collateral; (ii) would file a termination statement with respect to its security interest in the personal property collateral; and (iii) was releasing its claims against those guarantors. The documents lacked any indication that the secured party was transferring the personal property collateral.
  • 3455 LLC v. NP Properties, Inc., 2014 WL 3845696 (N.D. Ga. 2014) – Landlord that had a security interest in the tenant’s equipment to secure the obligation to pay rent was entitled to simply retain the equipment remaining on the leased premises because the lease also provided that upon being dispossessed, the tenant’s “equipment shall be deemed conclusively to be abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without written notice . . . and without obligation to account for them,” and such a term is enforceable under Georgia law.
  • Skaff v. Progress International, LLC, 2014 WL 5454825 (S.D.N.Y. 2014) – Secured party’s collateral was not limited to deposit accounts, which were the only collateral described in the security agreement, but included the additional collateral described in the parties’ merger agreement, which also granted a security interest. A receiver appointed by the court after the secured party obtained a default judgment would be authorized to take control of and preserve the debtor’s assets and conduct an accounting – broader authority than what the security agreement provided – but would not be authorized to liquidate the assets and apply the proceeds to satisfy the judgment debt.
  • Lefkowitz v. Quality Labor Management, LLC, 2014 WL 5877850 (Fla. Dist. Ct. App. 2014) – Trial court erred in denying secured party’s request to intervene in action in which creditor obtained a charging order on the debtor’s ownership interests in limited partnerships and LLC, which constituted the secured party’s collateral.
  • Peoples Bank v. Bluewater Cruising LLC, 2014 U.S. Dist. LEXIS 6428 (W.D. Wash. 2014) – After a finding that a secured party did not comply with the UCC foreclosure requirements, the court found the secured party also failed to establish the value of the collateral to overcome the presumption that the collateral was valued at the amount of the debt.
  • General Electric Capital Corporation v. FPL Service Corp, 995 F.Supp.2d 935 (N.D.Iowa 2014) – Court evaluates both the Article 9 commercial reasonableness standard and the presumptions rules for deficiency judgments.
  • EBC Asset Investment, Inc. v. Sullivan Auctioneers, LLC, 2014 U.S. Dist. LEXIS 21724 (C.D.Ill. 2014) – Where auction house allegedly auctioned off secured party’s collateral without consent, five year statute of limitations for converting a secured party’s collateral, not three year statute of limitations for instruments under Article 3, applied. Illinois law specifically provides that an auctioneer that auctions pledged property without consent of the secured party is liable for conversion.
  • Adame v. Vista Bank, 2014 WL 5839893 (Tex. Ct. App. 2014) – By answering with a general denial the secured party’s complaint in an action for a deficiency, the debtor failed to place the commercial reasonableness of the disposition of limousines at issue.
  • Gwinnett Community Bank v. Arlington Capital, LLC, 757 S.E.2d 239 (Ga. Ct. App. 2014) – Because the trial
    court’s ruling that the bank that sold a promissory note was barred from seeking a deficiency by either § 9-608(b) or § 9-615(e) was law of the case (even though those provisions apply when the underlying transaction is a sale of a promissory note, not when the security interest is foreclosed by selling a promissory note), the ruling bound the debtor as well as the bank, and the debtor had no cause of action against the bank for lost surplus.
  • Security Alarm Financing Enterprises, Inc. v. Parmer, 2014 WL 1478840 (N.D.W. Va. 2014) – Debtor’s owner, whose aunt purchased secured notes and foreclosed by acquiring the collateral at a foreclosure sale by credit bid, allegedly as part of the owner’s scheme to avoid payment to a judgment creditor who had agreed to halt a sheriff’s sale pending settlement negotiations, was not entitled to summary judgment, even if the aunt was not aware of all aspects of the alleged fraudulent conspiracy. Summary judgment also denied on whether the aunt took free of the judgment lien because her good faith was in dispute.
  • Opportunity Fund, LLC v. Savana, Inc., 2014 WL 4079974 (S.D. Ohio 2014) – Summary judgment denied on whether entity formed by passive investor who owned 0.01% of the debtor and which acquired the bulk of the debtor’s assets at a public foreclosure sale conducted by the debtor’s secured lender had successor liability as the survivor in a de facto merger or as a mere continuation of the debtor.
  • Agit Global, Inc. v. Wham-O, Inc., 2014 WL 1365200 (S.D. Cal. 2014) – Two entities that acquired the assets of business from a secured party – who itself had acquired them at a foreclosure sale – and who then operated the same business from the same location with the same employees did not have successor liability for the debtor’s debts as a mere continuation because the buyers did not acquire the assets directly from the predecessor (the debtor). However, the buyers did have successor liability on that grounds that the transfers were a fraudulent scheme to escape liability for the debts in part because the assets were worth $31 million while the secured debt was only $13.6 million and the secured party resold them shortly thereafter for half their value.
  • BRS-Tustin Safeguard Associates II, LLC v. iTherX Pharma, Inc., 2014 WL 2621117 (Cal. Ct. App. 2014) – The entity newly formed by lenders who, after a landlord obtained a writ of attachment for the debtor’s property, conducted a strict foreclosure and transferred all of the debtor’s assets to the entity, had successor liability as a mere continuation of the debtor because the new entity had a name very similar to the debtor’s name, possessed all of the debtor’s assets, continued to conduct the same clinical trials of the same drugs, operated under a manufacturing contract without any modification (i.e., it did not make itself a party to the agreement), and shared many of the same key personnel, including the chief executive officer, chief scientist, and several board members.
  • Amegy Bank v. DB Private Wealth Mortgage, Ltd., 83 U.C.C. Rep. Serv. 2d 720 (M.D. Fla. 2014) – Entity that was liable to the secured party for colluding with the debtor in converting the collateral was not liable for the secured party’s attorney’s fees incurred in obtaining the declaratory judgment. Under § 9- 607(d), attorney’s fees may be deducted from the amounts of a collection but may not be added to the award. Although the security agreement provided for recovery of attorney’s fees, and § 9-201(a) makes the security agreement effective against creditors, the defendant was not a creditor of the debtor.
  • Automotive Innovations v. J.P. Morgan Chase Bank, _ N.J. Super. _ (App. Div. 2015) – Article 9 foreclosure sale does not insulate buyer from ‘successor liability’ claim. Automotive Innovations v. J.P. Morgan Chase Bank, _ N.J. Super. _ (App. Div. 2015) – Article 9 foreclosure sale does not insulate buyer from ‘successor liability’ claim.

G. Collection

  • ImagePoint, Inc. v. JPMorgan Chase Bank, 84 U.C.C. Rep. Serv. 2d 36 (S.D.N.Y. 2014), 2014 WL 3891326 (S.D.N.Y. 2014) – Assignee of original secured party had standing to bring collection action against account debtor despite a prohibition against assignment in the account debtor’s agreement with the debtor because § 9-406(d) rendered the prohibition ineffective. The assignment was not excluded from the scope of Article 9 by § 9-109(d)(5) or (7) and even if the assignee is subject to all claims and defenses of the account debtor, that does not make the prohibition on assignment effective. The fact the assignee never perfected the security interest or provided notification of the assignment to the account debtor did not undermine the assignee’s right to collect.
  • In re Duckworth, 2014 WL 690553 (Bankr. C.D. Ill. 2014) – Grain buyer had claim for recoupment for partial breach of contract under which the debtor had made partial delivery and setoff claim for debtor’s breach of second, unrelated contract. The grain buyer could use the recoupment claim under § 9-404(a)(1) to reduce its liability to the secured party with a security interest in the debtor’s grain and the proceeds thereof. Whether the grain buyer could use its setoff rights to reduce its liability depended on whether the secured party’s notice of its interest in the debtor’s crop – which was deficient under the Food Security Act – nevertheless satisfied the requirements of § 9-404(a)(2).
  • Vinings Bank v. Brasfield & Gorrie, LLC, 759 S.E.2d 886 (Ga. Ct. App. 2014) – Bank with a security interest in the accounts of a subcontractor that had gone out of business was not entitled to summary judgment on the bank’s collection action against the general contractor because the subcontracts entitled the contractor to withhold or deduct from any payment the amounts necessary to protect the contractor if the subcontractor failed to complete the work or failed to pay its suppliers, and those amounts were not yet determined. The bank was also not entitled to summary judgment on the contractor’s claim against the bank for debiting the subcontractor’s deposit accounts because some of the deposited funds might have been held in constructive trust for the subcontractor’s suppliers who had filed liens or had the right to file liens.
  • First Trinity Capital Corp. v. Canal Indemnity Insurance Co., 2014 WL 460894 (S.D. Miss. 2014) – Insurance premium financier had no cause of action against insurer for return of unearned insurance premiums because, due to the fraud of the independent broker, the insurer never received payment and never issued a policy. The broker had neither actual nor apparent authority to act on behalf of the insurer.
  • First Trinity Capital Corp. v. Western World Ins. Group, Inc., 2014 WL 460887 (S.D. Miss. 2014) – Insurance premium financier had no cause of action against insurer for return of unearned insurance premiums because, due to the fraud of the independent broker, the insurer never received payment and never issued a policy. The broker had neither actual nor apparent authority to act on behalf of the insurer.

H. Retention of collateral

  • Blanken v. Kentucky Highlands Investment Corp., 82 U.C.C. Rep. Serv. 2d 815 (E.D. Ky. 2014) – The assignee of a secured party in a transaction structured as a lease of equipment but which was really a sale with a retained security interest, who, after the debtor’s default, entered into an agreement with the debtor to reduce the debtor’s monthly payments and eliminate the debtor’s purchase rights did not, thereby, accept the collateral in full satisfaction of the secured obligation because the debtor thought it was merely a lessee, not the owner, and thus could not have consented to an acceptance of the collateral. Whether the assignment was a disposition and whether the assignee acted in good faith so as to cut off a junior se
    curity interest were questions that could not be resolved prior to discovery.
  • Born v. Born, 320 P.3d 449 (Kan. Ct. App. 2014) – Creditor with a security interest in stock adequately proposed to accept the stock in satisfaction of the secured obligation even though the creditor’s post-default letters to the debtor did not state that the debtor had the right to object or indicate either the amount due or a means of calculating that amount. Although the debtor timely objected to the proposal, because the security agreement limited the secured party’s rights after default to acceptance of the collateral, and thus the secured party could not conduct a disposition, the debtor had to redeem the collateral within a timely manner. Because the debtor did not do so, the secured party became the owner of the stock.
  • TAP Holdings, LLC v. Orix Finance Corp., 2014 WL 5900923 (N.Y. Sup. Ct. 2014) – Senior lenders who, after taking control of the debtor’s board, acquired all of the debtor’s assets in satisfaction of the secured obligation and then transferred those assets to a newly formed entity did not conduct an acceptance of the collateral. The Foreclosure Agreement stated that the debtor agrees to “sell, assign and transfer the Subject Assets” to the newly formed entity and that the “Buyer wishes to purchase the Subject Assets and assume certain liabilities” of the debtor. The terms of the Foreclosure Agreement therefore suggest, in substance, a private sale of an entire business as a going concern, rather than the simple taking of collateral by a secured party.

II-A. Liens Airising in Sales Transactions

1. Interest of buyer in identified goods under Commercial Code Section 2501.3

Statutory Framework:

Subdivisions (1) and (2) of Commercial Code § 2501 provide as follows:

  1. The buyer obtains a special property and an insurable interest in goods by identification of existing goods as goods to which the contract refers even though the goods so identified are nonconforming and he has an option to return or reject them. Such identification can be made at any time and in any manner explicitly agreed to by the parties. In the absence of explicit agreement, identification occurs
    1. When the contract is made if it is for the sale of goods already existing and identified;
    2. If the contract is for the sale of future goods other than those described in paragraph c, when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers;
    3. If the contract is for the sale of unborn young or future crops, when the crops are planted or otherwise become growing crops or the young are conceived;
  2. The seller retains an insurable interest in goods so long as title to or any security interest in the goods remains in him and where the identification is by the seller alone he may until default or insolvency or notification to the buyer that the identification is final substitute other goods for those identified.

How the Lien Arises/Attaches:

This special property and insurable interest applies automatically upon identification of existing goods as goods to which a contract refers unless there is explicit agreement otherwise. The interest established under Section 2501 is a precondition for passage of title to goods under a contract.4 No distinction is made between goods in a deliverable state and those that require additional labor before delivery. Identification of goods occurs (i) when the contract is made if it is for the sale of goods already existing and identified per Commercial Code § 2501(1)(a), (ii) when they are shipped, marked or otherwise “designated” by the seller as goods to which the contract refers if the contract is for the sale of future goods other than those described in Commercial Code § 2501(1)(c) per Commercial Code § 2501(1)(b), or (iii) after they are planted with respect to future crops and after they are conceived with respect to unborn young, per Commercial Code § 2501(1)(c).

Perfection of the Lien:

The special property interest is not technically a “security interest” so it cannot technically be “perfected.” Generally, it is the means by which California grants buyers the right to purchase insurance in goods identified to a contract and standing to sue third parties who tortiously interfere with goods identified to a contract. However, where a seller becomes insolvent within ten days of the first partial payment by a buyer with a special property interest under Commercial Code § 2501, that buyer may exercise its right to claim the identified goods by tendering the unpaid portion of the contract price.5 This limited right of a buyer to claim goods from an insolvent seller complements a seller’s limited reclamation right when the seller discovers that an insolvent buyer has received goods on credit. See Commercial Code § 2702, described herein.

Priority of the Lien:

Section 2501(3) provides that “[n]othing in this section impairs any insurable interest recognized under any other statute or rule of law.”

Unless and until the buyer tenders the unpaid portion of the contract price as stated above, secured parties are not likely to be harmed by this special property and insurable interest. 6

The Obligations Secured by the Lien:

Under Commercial Code § 2502, a buyer with a special property interest granted under Section 2501 may claim goods identified to the contract by tendering full payment where the seller has become insolvent within ten days following receipt of partial payment.

The Property Subject to the Lien:

Any goods that are subject to Division 2 of the Commercial Code may become subject to the lien. Commercial Code § 2105 defines “goods” as:

[A]ll things (including specially manufactured goods) which are movable at the time of identification to the contract or sale other than the money in which the price is to be paid, investment securities … and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty.

The Classes of Secured Party/Debtor Subject to the Lien:

Secured creditors who take as collateral anything which might become “goods” as such term is defined in Commercial Code § 2105 are subject to the lien.

A seller of goods is subject to this lien.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Section 2501(3) provides that “[n]othing in this section impairs any insurable interest recognized under any other statute or rule of law.” Therefore, claimants’ rights under Section 2501 are junior to those of existing secured creditors who have perfected their security interests.

Unless and until the buyer tenders the unpaid portion of the contract price as stated above, secured parties are not likely to be harmed by this special property and insurable interest.7

2. Security interest reserved by seller pursuant to Commercial Code Section 2505. 8

Statutory Framework:

Commercial Code § 2505 provides as follows:

  1. Where the seller has identified goods to the contract by or before shipment:
  2. His procurement of a negotiable bill of lading to his own order or otherwise reserves in him a security interest in the goods. His procurement of the bill to the order of a financing agency or of the buyer indicates in addition only the seller’s expectation of transferring that interest to the person class=”anchor” named.
  3. A nonnegotiable bill of lading to himself or his nominee reserves possession of the goods as security but except in a case of conditional delivery, (subdivision (2) of Section 2507) a nonnegotiable bill of lading naming the buyer as consignee reserves no security interest even though the seller retains possession of the bill of lading.
  4. When shipment by the seller with reservation of a security interest is in violation of the contract for sale it constitutes an improper contract for transportation within the preceding section but impairs neither the rights given to the buyer by shipment and identification of the goods to the contract nor the seller’s powers as a holder of a negotiable document.

How the Lien Arises/Attaches:

The lien arises when a seller has identified goods to a contract and procured a bill of lading for shipment, except if a nonnegotiable bill of lading lists the buyer as a consignee. The lien lasts until the buyer has lawfully obtained possession of the goods.

Perfection of the Lien:

No further action is necessary to perfect the lien.

Priority of the Lien:

Commercial Code § 9110 subjects a security interest arising under Section 2505 to Division 9, and provides that, until the recipient obtains possession of the goods, the security interest has priority over conflicting security interests, including a security interest existing prior to the creation of the Section 2505 lien.

The Obligations Secured by the Lien:

The security interest is restricted to securing payment or performance by the buyer and does not affect the location of title generally.

The Property Subject to the Lien:

This lien pertains to any identified goods under shipment. Section 2105(1) defines “goods” as:

…all things (including specially manufactured goods) which are movable at the time of identification to the contract or sale other than the money in which the price is to be paid, investment securities (Division 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2107).

The Classes of Secured Party/Debtor Subject to the Lien:

Secured parties are any party taking a security interest in the assets of a debtor that are used to purchase shipped goods.

Debtors are buyers of goods who have not received the goods.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Generally a secured party cannot maintain its priority over this hidden lien. However, the operation of this lien is not likely to place a secured party who has an all asset grant or where the security interest includes proceeds of such goods in a particularly bad position. Any payments made by the buyer to the seller for such goods will presumably become a component of the secured party’s collateral. Because a large percentage of the lien amount will probably be allocable to payments made by the buyer, except in cases where the buyer incurred large amounts of expenses with respect to the goods, the payments made by the buyer should generally cover the damage to the secured party’s position caused by the effective subordination of its security interest of the seller.

Secured parties can protect themselves against this hidden lien by requesting that shipment involve a nonnegotiable bill of lading naming the buyer/debtor as consignee.

3. Reclamation right of seller under Commercial Code Section 2702.9

Statutory Framework:

Commercial Code § 2702(2), (3) states as follows:

  1. Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within 10 days after receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the 10-day limitation does not apply. Except as provided in this subdivision the seller may not base a right to reclaim goods on the buyer’s fraudulent or innocent misrepresentation of solvency or of intent to pay.
  2. The seller’s right to reclaim under subdivision (2) is subject to the rights of a buyer in the ordinary course or other good faith purchaser under this division (Section 2403). Successful reclamation of goods excludes all other remedies with respect to them.Inasmuch as the right to reclaim goods under § 2702(2) vests a seller with the right to specific goods on account of the buyer/debtor’s obligations, i.e. the payment of the purchase price or damages for breach, the reclamation right operates like a lien on the goods.

How the Lien Arises/Attaches:

The reclamation right, which is effectively a lien, arises when a seller of goods sells goods on credit to an insolvent buyer. The right expires if no demand for return is made within 10 days of the buyer’s receipt of the goods where buyer makes no misrepresentation with respect to insolvency, but the 10-day time limit does not apply if the buyer makes a written misrepresentation as to its solvency within 3 months of delivery of the goods. As discussed below, if the buyer files a bankruptcy petition before the 10-day period expires, Bankruptcy Code § 546 (c) will under certain circumstances extend the time to make a timely demand for return of the goods.

Perfection of the Lien:

A seller must demand the return of the goods by the buyer within 10 days of the buyer’s receipt of the goods. No other filings or notices are required to create an enforceable reclamation right.

Priority of the Lien:

Section 2702(3) expressly states that a seller’s reclamation right is subject to the rights of a buyer in the ordinary course or other good faith purchasers. Most secured creditors of a buyer will constitute “good faith purchasers” under the Commercial Code (Sections 1201(20), (29) and (30)), so the right of a seller to reclaim goods will typically be subordinate to the rights of a secured creditor of the buyer. See, e.g. In re Nitram, Inc., 323 B.R. 792, 797 (Bankr. M.D. Fla 2005). Lien creditors of the buyer are subject to a seller’s reclamation rights.

The Obligations Secured by the Lien:

As the reclamation right is not truly a lien it secures nothing but the right to have the goods themselves returned. If exercised, the reclamation right is an exclusive remedy.

The Property Subject to the Lien:

Any goods which are sold to the buyer when the buyer is insolvent and which are actually received by the buyer. Section 2105(1) defines “goods” as:

…all things (including specially manufactured goods) which are movable at the time of identification to the contract or sale other than the money in which the price is to be paid, investment securities (Division 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2107).

The right to reclaim goods only applies to goods that the buyer retains: the “lien” does not follow the goods into proceeds or other goods into which the goods may be incorporated.

The Classes of Secured Party/Debtor Subject to the Lien:

A buyer/debtor who buys goods while insolvent is subject to the reclamation right.

A secured creditor who takes as collateral anything constituting “goods” as such term is defined in Commercial Code § 2105 may have to contend with a seller’s right of reclamation rights. As noted above, such secured creditors’ lien, if valid and perfected, would not be subject to such reclamation right.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Generally, a secured party’s priority will not be at risk when a seller asserts its reclamation rights because as a “good faith purchaser” those rights will not be subject to a seller’s reclamation right.

Miscellaneous:

Prior to the 2005 amendments to the U.S. Bankruptcy Code § 546(c) preserves seller’s state law reclamation rights, with a few minor alterations. The recent amendments to the Bankruptcy Code completely rewrote § 546(c), which now reads as follows:

  1. Except as provided in subsection (d) of this section and in section 507(c), and s
    ubject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller’s business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such seller may not reclaim such goods unless such seller demands in writing reclamation of such goods —
    1. not later than 45 days after the receipt of such goods by the debtor; or
    2. not later than 20 days after the date of commencement of the case, if the 45-day period expires after the commencement of the case.
  2. If a seller of goods fails to provide notice in the manner described in paragraph (I), the seller still may assert the rights contained in section 503(b)(9) [giving administrative priority to sellers of goods sold to the debtor in the ordinary course of business in the 20 days prior to the commencement of the bankruptcy].

This revision was not accompanied by any significant legislative history, so it is unclear exactly how sweeping these changes were intended to be. Some commentators have speculated that there now exists a federal reclamation right, and that state reclamation rights, such as Commercial Code § 2702, no longer inform the exercise of reclamation rights when a buyer of goods is in bankruptcy. Sellers of goods, secured creditors who lend to buyers of goods, and their counsel are advised to track § 546(c) jurisprudence as it develops, which development may materially affect their rights in goods purchased by an insolvent buyer.

The subordination of the reclaiming seller’s rights to the “prior rights of a holder of a security interest” (see § 546(c)(1)) does not employ the traditional language of priority used in the Commercial Code, and, while it appears to protect secured creditors to the same extent as Commercial Code § 2702, courts may interpret it as a less thorough protection than that given by § 2702.

4. Security interest of buyer in rejected goods pursuant to Commercial Code 2711.10

Statutory Framework:

Commercial Code § 2711(3) states as follows:

On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (Section 2706).

The comments to Commercial Code § 2711(3) provide the following interpretive aid:

… [T]he buyer may hold and resell rejected goods if he has paid a part of the price or incurred expenses of the type specified. “Paid” as used here includes acceptance of a draft or other time negotiable instrument or the signing of a negotiable note. [The buyer’s] freedom of resale is coextensive with that of a seller under [Article 2 of the Commercial Code] except that the buyer may not keep any profit resulting from the resale and is limited to retaining only the amount of the price paid and the costs involved in the inspection and handling of the goods. The buyer’s security interest in the goods is intended to be limited to the items listed in subsection (3), and the buyer is not permitted to retain such funds as he might believe adequate for his damages. The buyer’s right to cover, or to have damages for non-delivery, is not impaired by his exercise of his right of resale.

How the Lien Arises/Attaches:

The lien arises when a buyer has rightfully rejected goods or justifiably revoked acceptance of goods, possesses or controls such goods and has either paid for such goods in whole or in part, accepted a draft or other negotiable instrument, signed a negotiable note or incurred reasonable expenses related to such goods.

Perfection of the Lien:

The buyer must possess or control the goods for the lien to attach. No further action is necessary to perfect the lien.

Priority of the Lien:

Commercial Code § 9110 subjects a security interest arising under § 2711(3) to Division 9, and provides that, until the seller/debtor again obtains possession of the goods, the security interest has priority over a conflicting security interest created by the seller/debtor, including a security interest existing prior to the creation of the § 2711(3) lien.

The Obligations Secured by the Lien:

The lien secures a seller’s obligation to repay a buyer for the buyer’s payments for, or reasonable expenditures with regard to goods with respect to which the buyer rightfully rejects or justifiably revokes its acceptance.

The Property Subject to the Lien:

Any goods which are subject to Division 2 of the Commercial Code may become subject to the lien. Section 2105(1) defines “goods” as:

… all things (including specially manufactured goods) which are movable at the time of identification to the contract or sale other than the money in which the price is to be paid, investment securities (Division 8) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2107).

The Classes of Secured Party/Debtor Subject to the Lien:

Secured creditors who take as collateral anything which might become “goods” as such term is defined in Commercial Code § 2105 are subject to the lien.

A seller of goods is subject to this lien.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Generally, a secured party can’t maintain its priority over this hidden lien. However, the operation of this lien should not place a secured party who has an all asset grant or where the security interest includes proceeds of such goods in a particularly bad position. Any payments made by the buyer to the seller for such goods will presumably become a component of the secured party’s collateral. Because a large percentage of the lien amount will probably be allocable to payments made by the buyer, except in cases where the buyer incurred large amounts of expenses with respect to the goods, the payments made by the buyer should generally cover the damage to the secured party’s position caused by the effective subordination of its security interest to that of the buyer.

A secured party lending to a seller of goods might require the seller to include in all of its sales contracts a buyer waiver whereby the buyer agrees to immediately return goods that are rightfully rejected or the acceptance of which is justifiably revoked and to waive its security interest in such goods. This is an onerous provision for buyers, and it is unlikely that a seller, afraid of the aversion buyers might have to such a provision, would agree to include such a provision in all of its sales contracts.

A secured party could require its debtor (the seller) to give prompt notice of any rejection or revocation of acceptance. This would enable the secured party to monitor the creation of § 2711(3) liens. Sellers of goods will sometimes have cure rights under Division 2, and, if the problem that led to the buyer rightfully refusing goods or justifiably revoking its acceptance of goods is cured, then the lien will cease to exist. A secured party with notice of a rejection or revocation may be in a position to exert influence on its debtor to cause it to effectuate such a cure.

Secured parties who lend to sellers who scrupul
ously honor their sales contracts will have the most success in avoiding § 2711(3) liens.

5. Lien of seller of real property under Civil Code Section 3046.11

Statutory Framework:

Civil Code § 3046 provides as follows:

Lien of Seller of Real Property. One who sells real property has a vendor’s lien thereon, independent of possession, for so much of the price as remains unpaid and unsecured otherwise than by the personal obligation of the buyer.

How the Lien Arises/Attaches:

The vendor’s lien under California Civil Code § 3046 arises in transactions for the sale of real property where the purchaser does not furnish full consideration. An explicit contractual provision is not necessary, as the vendor’s lien arises by operation of law. Cain v. Hunter, 161 Cal. App. 2d 808, 812 (Cal. App. 1 Dist. 1958). No recording or other further action is necessary in order for the lien to be valid. The vendor’s lien arises and is operational upon transfer of title when the purchaser becomes a debtor for an ascertained fixed consideration of money that is not otherwise secured. McGreevy v. Constitution Life Ins. Co., 238 Cal. App. 2d 364, 368 (App. 5 Dist. 1965).

Priority of the Lien:

Civil Code § 3048 provides as follows:

The liens defined in sections 3046 and 3050 are valid against every one claiming under the debtor, except a purchaser or incumbrancer in good faith and for value.

If a purchaser sells the real property or grants a deed of trust to a third party for value and without notice of an existing vendor’s lien, the third party has priority. A deed of trust given to secure a pre-existing debt grants the secured party, who had no notice of the vendor’s lien, the status of a bona fide purchaser for valuable consideration and priority over a vendor’s lien. Valley Vista Land Co. v. Nipomo Water & Sewer Co., 266 Cal. App. 2d 331, 340 (App. 2 Dist. 1968); Schut v. Doyle, 168 Cal. App. 2d 698, 701-702 (App. 4 Dist. 1959).

Further, regardless of whether it has notice of a vendor’s lien, a secured party has priority when a purchase-money mortgage or deed of trust in favor of the secured party and a vendor’s lien in favor of the seller arise out of a single sale transaction. Brock v. First South Savings Assn., 8 Cal. App. 4th 661, 665 (App. 3 Dist. 1992). Thus, if a secured party extends credit to a purchaser for the acquisition of real property and the purchaser does not pay full consideration, the deed of trust in favor of the secured party takes priority over a vendor’s lien. Id.

On the other hand, the vendor’s lien takes precedence over claims and liens of judgment and attachment creditors of the debtor. Schut v. Doyle, 168 Cal. App. 2d 698, 703 (App. 4 Dist. 1959).

The Obligations Secured by the Lien:

The vendor’s lien secures any amount of the purchase price of real property that remains unpaid by the purchaser and is otherwise unsecured.

The Collateral Subject to the Lien:

The interest in real property for which full consideration was not paid by the purchaser, even if such interest is less than a fee interest, is the only property of the purchaser that is subject to the vendor’s lien. Rogers Development Co. v. Southern California Real Estate Inv. Co., 159 Cal. 735, 740 (Cal. 1911).

The Classes of Secured Party/Debtor Subject to the Lien:

  1. The purchaser of the real property.
  2. Secured parties or creditors taking a lien in the real property in transactions subsequent to its purchase, except for any party who is a bona fide purchaser or encumbrancer for value and without notice of the Vendor’s Lien.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

When lending money for the purchase of real property, a secured party is not adversely affected by the vendor’s lien as the secured party’s security interest is superior to any vendor’s lien that may arise from the transaction.

When lending money to a real property owner, a secured party is a bona fide encumbrancer for value and is not affected by a vendor’s lien so long as it has no notice of the lien. If a secured party has any reason to believe that a vendor’s lien might exist on real property collateral, it may be prudent to undertake one or more of the following due diligence actions: (i) obtain copies of the purchase agreement and escrow agreement pursuant to which the real property owner acquired the property; (ii) obtain evidence that full consideration has been paid by the real property owner to the seller or that any deficiency in consideration is otherwise secured; and/or (iii) obtain a vendor’s lien waiver executed by the seller.

Miscellaneous:

The vendor’s lien can be waived by the seller without following any particular formality, however, the burden of showing waiver is on the asserting party. McGreevy v. Constitution Life Ins. Co., 238 Cal. App. 2d 364, 368 (App. 5. Dist 1965). Any action which shows intent to waive the vendor’s lien is sufficient to do so, including taking independent security for unpaid consideration or entering into an agreement pursuant to which the seller waives the lien.

6. Lien of purchaser of real property under Civil Code Section 3050.12

Statutory Framework:

Civil Code § 3050 provides as follows:

Purchaser’s Lien On Real Property. One who pays to the owner any part of the price of real property, under an agreement for the sale thereof, has a special lien upon the property, independent of possession, for such part of the amount paid as he may be entitled to recover back, in case of a failure of consideration.

How the Lien Arises/Attaches:

The vendee’s lien in the amount paid to the seller arises in favor of a real property purchaser when such purchaser has entered into a contract and paid money towards the purchase price of real property and the seller fails to meet its obligations under the contract. Benson v. Shotwell, 87 Cal. 49, 54-55 (1890). No recording or other further action is necessary in order to perfect the lien.

Moreover, when a seller refuses to convey per the terms of a contract, the purchaser can elect to treat the contract as terminated and foreclose on the vendee’s lien for any money paid towards the purchase price of the real property. Moresco v. Foppiano, 7 Cal. 2d 242, 247 (1936).

However, the vendee’s lien arises only when the purchaser was not first in breach of the contract. Benson v. Shotwell, 87 Cal. 49, 54-55 (1890); Wilson v. Smith, 69 Cal. App. 211, 214 (App. 2 Dist. 1924).

Priority of the Lien:

Civil Code § 3048 provides as follows:

The liens defined in sections 3046 and 3050 are valid against everyone claiming under the debtor, except a purchaser or incumbrancer in good faith and for value.

A subsequent purchaser or encumbrancer for value and without notice is not subject to the vendee’s lien. In contrast, a deed of trust granted subsequent to the date of the purchase contract does not have priority over a vendee’s lien when the secured party has notice of the lien. Lockie v. Cooperative Land Co., 207 Cal. 624, 628-29 (1929). Additionally, even if a secured party holds a deed of trust prior to the date of a purchase contract, optional additional advances secured by the deed of trust but made after the date of the purchase contract are inferi
or to the vendee’s lien if the secured party was on notice of the purchase contract. Garcia v. Atmajian, 113 Cal. App. 3d 516, 519-21 (App. 5 Dist. 1980).

The Obligations Secured by the Lien:

The vendee’s lien secures any amount paid towards the purchase price of the real property including money spent by the purchaser towards improvements, taxes and insurance. Garcia v. Atmajian, 113 Cal. App. 3d 516, 521 (App. 5 Dist. 1980); Lockie v. Cooperative Land Co., 207 Cal. 624, 628 (1929).

The Collateral Subject to the Lien:

The real property for which purchase money is rendered is the only property of the seller subject to the vendee’s lien. Newcomb v. Title Guarantee & Trust Co., 131 Cal. App. 329, 333 (App. I Dist. 1933).

The Classes of Secured Party/Debtor Subject to the Lien:

  1. The seller of the real property.
  2. Secured parties or creditors taking a lien in the real property subsequent to the date of the purchase contract, except for any party who is a bona fide purchaser or encumbrancer for value and without notice of the vendee’s lien.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

When lending money to a real property owner, a secured party is a bona fide encumbrancer for value and is not affected by a vendee’s lien so long as it has no notice of the lien. If a secured party has any reason to believe that a vendee’s lien might exist on potential real property collateral, it may be prudent to undertake one or more of the following due diligence actions: (i) obtain copies of the purchase agreement and all related documents under which it believes a vendee’s lien might arise; (ii) obtain evidence that any payments towards the purchase price have been repaid by the real property owner; and/or (iii) obtain a waiver executed by the holder of the suspected vendee’s lien.

Similarly, if a secured party holds a deed of trust securing future obligations and obtains notice of a vendee’s lien, it should strongly consider taking one of the above actions before making additional optional advances to the real property owner.

7. Gift Certificate as Trust Property under Civil Code Section 1749.6.

[TO BE ADDED IN SUBSEQUENT DRAFT]

II-B. Liens for Performance of Services

1. Bankers’ Liens.13

a. Banker’s lien under Civil Code Section 3054.

Statutory Framework:

Civil Code § 3054, subdivision (a) provides as follows:

A banker, or savings and loan association, has a general lien, dependent upon possession, upon all property in his or her hands belonging to a customer, for the balance due the banker or savings and loan association from the customer in the course of the business.

How the Lien Arises/Attaches:

This lien is applicable to any deposit of the securities (such as commercial paper) deposited with a bank by the customer in the course of business. Kruger v. Wells Fargo Bank, (1974) 11 Cal. 3d 352, 521 P.2d 441; Pendleton v. Hellman Commercial Trust & Sav. Bank, (1922) 58 Cal. App. 448, 208 P. 702. This is distinguished from the bank’s “lien” against a depositor’s account or funds on deposit, which is technically a right of setoff. Id. However, subdivision (b) of Civil Code § 3054 expressly limits the exercise of the banker’s lien with respect to deposit accounts, thereby implicitly confirming that the banker’s lien also applies to deposit accounts. The money or property subject to the lien may then be applied by the bank toward the extinguishment of any matured indebtedness owed to it. American Surety Co. v. Bank of Italy, (1923) 63 Cal. App. 149, 218 P. 466. The exercise of this lien with respect to deposit accounts is subject to the limitations and procedures set forth in Fin. Code §§ 864 and 6600. A bank may also obtain a security interest expressed by a written contract as collateral for the debt owing to the bank by the customer.

Perfection of the Lien:

The lien is perfected by possession and the bank or savings and loan association need not take any action to perfect its lien.

Priority of the Lien:

Priority vis-à-vis Article 9 Security Interests. Section 9109(d)(2) of the Commercial Code provides that Division 9 does not apply to a lien, other than an agricultural lien, given by statute or other rule of law for services or materials, but Section 9333 applies with respect to priority of the lien. Section 9333 of the Commercial Code specifically provides that “[a] possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” Civil Code Section 3054 does not provide otherwise.

Priority vis-à-vis Other Liens. Section 2897 of the Civil Code generally provides that “[o]ther things being equal, different liens upon the same property have priority according to the time of their creation.” Although security interests do constitute “liens” under the general definition contained in Section 2872 of the Civil Code, this priority scheme does not apply to security interests. Section 2914 of the Civil Code specifically provides that more of the provisions contained in Sections 2872 through 2914 of the Civil Code apply to a security interest governed by the Commercial Code. Instead, this priority scheme applies solely to liens created under statutes or rules of law other than the Commercial Code.

The Obligations Secured by the Lien:

Any matured indebtedness owed by customer to the bank. This includes unmatured indebtedness owed to a bank upon the bankruptcy of the debtor/depositor. Barrios & Co. v. Indemnity Ins. Co., (1929) 101 Cal. App. 675, 282 P. 386.

The Collateral Subject to the Lien:

All property of a customer in the possession of the bank in the course of business is subject to the lien created by § 3054, however, special deposits, such as items held in trust or pledged for a specific purpose are not subject to this lien. Additionally, certain property exempted from attachment or execution under former CCP § 690.175 (now CCP § 704.120), such as disability benefits or unemployment compensation is exempt from this lien. Kruger v. Wells Fargo Bank, (1974) 11 Cal. 3d 352, 521 P.2d 441.

The Classes of Secured Party/Debtor Subject to the Lien:

  1. Secured parties are any party taking a security interest in the assets of a debtor that are held at a bank.
  2. Debtors are customers (i.e. natural-born persons) of a bank and guarantors of the indebtedness who also have accounts or property held by the bank in the course of business.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Secured parties can protect themselves against this hidden lien by (a) requesting a waiver of this lien from any bank where collateral is held and (b) having the account or property held for it by the bank as escrow holder, trustee, custodian or other special purpose, as the property under the lien must belong “to the customer” and come into the hands of the banker in the course of business. See Goggin v. Bank of America, (1950) 183 F.2d 322.

b. Banker’s lien under Financial Code Section 1670.

Statutory Framework:

Financial Code § 1670, provides as follows:

Whenever a bank receives personal property for safekeeping or storage as a bailee and issues a receipt therefor, the bank may enforce its lien as a warehouseman in accordance with the provisions of the Commercial Code or at its option in the manner provided in Sections 1671 to 1673, inclusive, of this article.

How the Lien Arises/Attaches:

This lien arises only when the bank is acting as a bailee, and does not arise when the assets at hand are general deposits (see Cory v. Golden State Bank (1979) 95 Cal. App. 3d 360, 157 Cal. Rptr. 538). Under Sections 1671 to 1763 of the Financial Code, the lien secures amounts owing to the bank for the safekeeping or storage of such personal property. If the amount so charged by the bank remains unpaid for 6 months from the date it was due, the bank may send a notice to the person in whose class=”anchor” name the receipt was issued, giving the amount then due and stating that unless such amount and any other accrued charges are not paid, the bank will sell such personal property at a time and place class=”anchor” named therein, but at least 30 days after the date of such mailing. Notice of such sale shall be published once at least five days prior to the sale in a newspaper of general circulation published in the county in which the sale is to be held, and if no such newspaper is published in such county, then the notice shall be posted in three public places at least five days prior to the sale. The bank shall be entitled to deduct the reasonable expenses for notices, advertising and sale from the proceeds of such sale. Any item offered for sale by the bank but for which no purchaser is found shall be retained by the bank for at least one year.

Perfection of the Lien:

No action is necessary to perfect this lien.

Priority of the Lien:

The statute does not specify priority but banker’s liens are commonly understood to have priority over all other claims to the same collateral.

The Obligations Secured by the Lien:

Under Sections 1671 to 1763 of the Financial Code, the lien secures amounts owing to the bank for the safekeeping or storage of such personal property.

The Collateral Subject to the Lien:

Any personal property received by a bank for storage or safekeeping.

The Classes of Secured Party/Debtor Subject to the Li
en:

  1. Any bank that accepts personal property for storage or safekeeping.
  2. Any person who uses a bank as bailee for personal property.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Secured parties can obtain priority over the lien created under Financial Code § 1670 and protect themselves against this hidden lien by possession of the personal property in question.

c. Security interest of collecting bank in items, accompanying documents and proceeds under Commercial Code Section 4210.

[TO BE ADDED IN SUBSEQUENT DRAFT]

d. Lien of presenting bank under Commercial Code Section 4504.

[TO BE ADDED IN SUBSEQUENT DRAFT]

e. Security interest in document presented under letter of credit pursuant to Commercial Code Section 5118.

[TO BE ADDED IN SUBSEQUENT DRAFT]

f. Depositary lien under Civil Code Section 1856.

[TO BE ADDED IN SUBSEQUENT DRAFT]

2. Liens for Warehousing and Storage. 14

a. Warehouseman’s Lien under Commercial Code Section 7209.

Statutory Framework:

Section 7209 of the California Commercial Code provides as follows:

A warehouseman has a lien against the bailor on the goods deposited or on the proceeds thereof in his possession for charges for storage, processing incidental to storage, or transportation, including demurrage and terminal charges, insurance, labor, or charges present or future in relation to the goods, and for expenses necessary for preservation of the goods or reasonably incurred in their sale pursuant to law. If the person on whose account the goods are held is liable for like charges or expenses in relation to other goods whenever deposited, the warehouseman also has a lien against him for such charges and expenses whether or not the other goods have been delivered by the warehouseman. But against a person to whom a negotiable warehouse receipt is duly negotiated a warehouseman’s lien is limited to charges specified on the receipt or if no charges are so specified then to a reasonable charge for storage of the goods covered by the receipt subsequent to the date of the receipt.

The warehouseman may also reserve a security interest against the bailor for charges other than those specified in subdivision (1), such as for money advanced and interest, but if a receipt is issued for the goods such a security interest is not valid as against third persons without notice unless the maximum amount thereof is conspicuously specified (Section 1201) on the receipt. Such a security interest is governed by the division on secured transactions (Division 9).

  1. A warehouseman’s lien for charges and expenses under subdivision (1) or a security interest under subdivision (2) is also effective against any person who so entrusted the bailor with possession of the goods that a pledge of them by him to a good faith purchaser for value would have been valid but is not effective against a person as to whom the document confers no right in the goods covered by it under Section 7503.
  2. A warehouseman’s lien on household goods for charges and expenses in relation to the goods under subdivision (1) is also effective against all persons if the depositor was the legal possessor of the goods at the time of deposit. “Household goods” means furniture, furnishings and personal effects used by the depositor in a dwelling.

A warehouseman loses his lien on any goods which he voluntarily delivers or which he unjustifiably refuses to deliver.

How the Lien Arises/Attaches:

There are several types of liens/security interests provided for in Commercial Code § 7200. Commercial Code § 7209(a) provides for a specific lien against the goods in the warehouseman’s possession for the storage charges incurred in connection with such goods. Commercial Code § 7209(a) also provides for a general lien that secures all storage charges incurred by the bailor, without regard to whether the charges are related to the goods then in the warehouseman’s possession. In addition to the liens provided for in Commercial Code § 7209(a), Commercial Code § 7209(b) also permits a warehouseman to retain a security interest. Such a security interest is governed by Article 9 of the Commercial Code and a warehouseman must comply with the provisions of Article 9 for the security interest to attach.

A lien under Commercial Code § 7209(a) arises automatically when goods are delivered to the warehouseman, provided that:

  1. The recipient of the goods must be a “warehouseman” (“a person engaged in the business of storing goods for hire” Commercial Code § 7102(1)(h)); and
  2. a warehouse receipt has been issued in respect of the goods.

Perfection of the Lien:

A warehouseman’s lien under Commercial Code § 7209(a) is a possessory lien and the warehouseman need not take any action to perfect its lien. Similarly, because a warehouseman has possession of the goods, it need not take any further action to perfect any security interest it retains pursuant to Commercial Code § 7209(b).

Priority of the Lien:

Priority vis-à-vis Article 9 Security Interests. Section 9109(d)(2) of the Commercial Code provides that Division 9 does not apply to a lien, other than an agricultural lien, given by statute or other rule of law for services or materials, but Section 9333 applies with respect to priority of the lien. Section 9333 of the Commercial Code specifically provides that “[a] possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” UCC § 7209 does not provide otherwise.

Priority vis-à-vis Other Liens. Section 2897 of the Civil Code generally provides that “[o]ther things being equal, different liens upon the same property have priority according to the time of their creation.” Although security interests do constitute “liens” under the general definition contained in Section 2872 of the Civil Code, this priority scheme does not apply to security interests. Section 2914 of the Civil Code specifically provides that none of the provisions contained in Sections 2872 through 2914 of the Civil Code apply to a security interest governed by the UCC. Instead, this priority scheme applies solely to liens created under statutes or rules of law other than the Commercial Code.

Pre-Existing Interests:

As to security interests or other rights in goods that are in existence at the time goods are delivered to the warehouseman, a warehouseman’s lien or security interest is subject to the restrictions of Commercial Code § 7503 pursuant to which a document of title confers no rights in goods as against a person who before issuance had a legal interest or a perfected security interest in such goods and neither (a) delivered or entrusted the goods or a document of title covering them to the bailor with actual or apparent authority to store the goods, nor (b) acquiesced in the procurement by the bailor of the document of title. The warehouseman’s lien and security interest, however, will have priority as against any person who so entrusted the bailor with the goods that a pledge of them by the bailor to a good faith purchaser for value would have been valid. Commercial Code § 7209(c).

Subsequently Arising Interests:

If the warehouse receipt issued in respect of the goods is a non-negotiable receipt, then the warehouseman’s lien is as effective against any third party taking the warehouse receipt as it is to the bailor.

If the warehouse receipt is negotiable, then as against a third party to whom the receipt was duly negotiated, the lien is limited to charges specified on the receipt or, if no charges are specif
ied, then to a reasonable charge for storage of the goods covered by the receipt subsequent to the date of the receipt.

Obligations Secured by the Lien:

A warehouseman’s lien secures “charges for storage, processing incidental to storage or transportation, including demurrage and terminal charges, insurance, labor, or charges present or future in relation to the goods, and for expenses necessary for the preservation of the goods or reasonably incurred in their sale pursuant to law.” Commercial Code § 7209(a).

The lien also secures obligations for similar charges owing to the warehouseman in relation to other goods even if those other goods are not then in the warehouseman’s possession. Under the uniform version of Commercial Code § 7209(a), a warehouseman must make a notation on the receipt if it is claiming a lien for storage charges related to goods other than those covered by the receipt. California’s version of Commercial Code § 7209(a) is non-uniform in that it does not require such a notation on the receipt.

Under Commercial Code § 7209(b), a warehouseman may also reserve a security interest against the bailor for charges other than the storage-related charges. Such a security interest is governed by Article 9 of the Commercial Code. Because the warehouseman has possession of the goods in which it has such a security interest, there may not be a financing statement of record. However, if a receipt is issued for the goods, a security under Commercial Code § 7209(b) is not valid as against third parties without notice unless the maximum amount is conspicuously specified on the receipt.

The Collateral Subject to the Lien:

The warehouseman’s lien under Commercial Code § 7209(a) extends to goods that are in the possession of the warehouseman. A warehouseman loses its lien on any goods which it voluntarily delivers or which it unjustifiably refuses to deliver.

As a warehouseman’s security interest under Commercial Code § 7209(b) is governed by Article 9 of the Commercial Code, the scope of the collateral will depend on the documentation between the bailor and the warehouseman.

The Classes of Secured Party/Debt or Subject to the Lien:

This warehouseman’s lien directly affects secured parties who finance debtors that deliver possession of goods to a warehouseman and debtors that deliver possession of goods to a warehouseman.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

To mitigate the effects of warehouseman’s liens, a lender may consider: (1) obtaining lien subordination agreements with any warehousemen, (2) carving any goods that are in the possession of a warehouseman from any borrowing base determination, (3) implementing a reserve for unpaid storage charges based upon the historical amounts owed to warehousemen, (4) requiring regular reporting of amounts owed to warehouseman and the identity of the warehousemen, and (5) including covenants in the loan agreement relative to the creation of warehouseman’s liens and security interests.

b. Garageman’s Lien under Civil Code Section 3068.

How the Lien is Created:

The lien under Section 3068 of the Civil Code is created when a person performs any of the following services (collectively, “Covered Services”) with respect to a Qualifying Vehicle: (a) makes repairs or performs labor upon, and furnishes supplies or materials for, the Qualifying Vehicle; (b) engages in the storage, repair or safekeeping of the Qualifying Vehicle; or (c) rents parking space for the Qualifying Vehicle. For purposes of this analysis, a “Qualifying Vehicle” is any vehicle of a type subject to registration under the Vehicle Code of the State of California other than a manufactured home, a mobile home or a commercial coach. Notwithstanding the general rule for the time when liens created by operation of law are deemed to arise set forth in Section 2882 of the Civil Code, Section 3068 of the Civil Code specifically provides that the lien created thereunder arises upon the first to occur of (i) the time when a written statement of charges for completed work or services is presented to the registered owner and (ii) 15 days after the work or services are completed.

Perfection of the Lien:

Once the lien has been created, no additional steps are required or permitted in order to perfect the lien. However, unless the lienor either applies for an authorization to conduct a lien sale or commences a court action within 30 days after the lien arises, the lien will be extinguished. Also, because the lien created by Section 3068 of the Civil Code is dependent upon possession, the lien will generally be extinguished if the lienor relinquishes possession of the Qualifying Vehicle.

Priority of the Lien:

Priority vis-à-vis Article 9 Security Interests. Section 9201 of the Commercial Code provides in part that a transaction subject to Division 9 of the Commercial Code is subject to the applicable provisions of Title 14 of Part 4 of Division 3 of the Civil Code. As noted above, these provisions include Section 3068 of the Civil Code. Section 9201 of the Commercial Code also provides that in the event of a conflict between Division 9 of the Commercial Code and one of the above provisions, the latter will control. Nothing in Section 3068 of the Civil Code or in any of the general provisions applicable thereto permits a security interest created under the Commercial Code to obtain priority over a lien created under Section 3068 of the Civil Code. Moreover, Section 9333 of the Commercial Code specifically provides that “[a] possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” Section 3068 of the Civil Code does not provide otherwise. In either event, it appears that a lien created under Section 3068 of the Civil Code is always prior in right to a security interest in the same property created under the Commercial Code.

Priority vis-à-vis Other Liens. Section 2897 of the Civil Code generally provides that “[o]ther things being equal, different liens upon the same property have priority according to the time of their creation.” Although security interests do constitute “liens” under the general definition contained in Section 2872 of the Civil Code, this priority scheme does not apply to security interests: Section 2914 of the Civil Code specifically provides that none of the provisions contained in Sections 2872 through 2914 of the Civil Code apply to a security interest governed by the Commercial Code. Instead, this priority scheme applies solely to liens created under statutes or rules of law other than the Commercial Code.

The Obligations Secured by the Lien:

The lien established by Section 3068 of the Civil Code secures payment of the compensation to which the person performing any Covered Services on the Qualifying Vehicle is legally entitled. However, certain limitations may apply to the overall amount of such compensation.

The Property Subject to the Lien:

The property subject to the lien is the Qualifying Vehicle. The Classes of Lienor and Lienee Subject to the Lien:

Lienor. The lienor is the person who performs Covered Services on the Qualifying Vehicle.

Lienee. The lienees are the registered and legal owners of the Qualifying Vehicle on which Covered Services were performed.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Protection Against Prior Lien:

Because the lien created by Section 3068 of the Civil Code is dependent upon possession by the lienor, the best way for a secured party to protect against the lien is to obtain possession of any Qualifying Vehicle in which it wishes to acquire a security interest. Of course, unde
rtaking appropriate due diligence prior to closing the transaction concerned and/or requiring appropriate representations, warranties and indemnities (among other contractual provisions) in the relevant transaction documents may also provide a measure of protection (risk mitigation) to the secured party.

Protection Against Future Liens:

Again, because the lien created by Section 3068 of the Civil Code is dependent upon possession by the lienor, the best way for a secured party to protect against the lien arising in the future is to obtain possession of any Qualifying Vehicle in which it has a security interest. If possession by the secured party is not feasible, appropriate covenants (among other contractual provisions) will provide at least some measure of protection (risk mitigation) to the secured party. Ultimately, however, such covenants cannot prevent the debtor from breaching its agreement with the secured party and permitting a Qualifying Vehicle in which the secured party has a security interest to become subject to the lien created under Section 3068 of the Civil Code. As noted above, such lien will be prior in right to the security interest in favor of the secured party.

Miscellaneous:

Sections 3071, 3072 and 3073 of the Civil Code contain detailed procedures regarding lien sales and various related matters, including applications for authorization to conduct a lien sale, notices to registered owners and other persons, and the disposition of proceeds.

c. Lien for self-service storage facility under Bus. & Prof. Code Sections 21705-21707.

[TO BE ADDED IN SUBSEQUENT DRAFT]

d. Safekeeping of funds or property of inmate after death, escape, discharge or parole under Government Code Section 6602.

[TO BE ADDED IN SUBSEQUENT DRAFT]

e. Towing or storage lien under Civil Code Section 3068.1.

[TO BE ADDED IN SUBSEQUENT DRAFT]

f. Lien of frozen food locker plant under Health & Safety Code Sections 28718 and 112590.

[TO BE ADDED IN SUBSEQUENT DRAFT]

3. Carrier’s Liens.

a. Carrier’s lien under Commercial Code Section 7307.15

Statutory Framework:

Commercial Code § 7307 provides for a carrier’s lien as follows:

  1. A carrier has a lien on the goods covered by a bill of lading for charges subsequent to the date of its receipt of the goods for storage or transportation (including demurrage and terminal charges) and for expenses necessary for preservation of the goods incident to their transportation or reasonably incurred in their sale pursuant to law. But against a purchaser for value of a negotiable bill of lading a carrier’s lien is limited to charges stated in the bill or the applicable tariffs, or if no charges are stated then to a reasonable charge.
  2. A lien for charges and expenses under subdivision (1) on goods which the carrier was required by law to receive for transportation is effective against the consignor or any person entitled to the goods unless the carrier had notice that the consignor lacked authority to subject the goods to such charges and expenses. Any other lien under subdivision (1) is effective against the consignor and any person who permitted the bailor to have control or possession of the goods unless the carrier had notice that the bailor lacked such authority.
  3. A carrier loses his lien on any goods which he voluntarily delivers or which he unjustifiably refuses to deliver.

How the Lien is Created:

The carrier’s lien arises by operation of law when payment is not made to the carrier for freight and storage charges pertaining to goods covered by a bill of lading.16

Perfection of the Lien:

A carrier’s lien is perfected upon its creation. Note that the carrier’s lien is a possessory lien and therefore requires possession by the carrier of the goods covered by the bill of lading. A carrier loses his lien on any goods that he voluntarily delivers or that he unjustifiably refuses to deliver. See Commercial Code § 7307(c).

Priority of Lien:

Commercial Code § 9333(b) provides that a “possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” (Emphasis added.) The carrier’s lien is just such a possessory lien. It is created by statute (Commercial Code § 7307(a)), and contains limited statutory exceptions as to priority (Commercial Code § 7307(b)).

The priority of the carrier’s lien as articulated by Commercial Code § 7307(2) has two components:

  1. The first component focuses on goods the carrier was “required by law”17 to receive for transportation. As to those goods, the carrier’s lien is effective against the “consignor”18 or “any person entitled to the goods”19 unless the carrier had notice that the consignor lacked authority to subject the goods to “such charges and expenses.”
  2. The second component is triggered when the carrier is not required by law to receive goods for transportation. In that case a carrier’s lien is effective against the “consignor” and anyone that permitted the bailor to have control or possession of the goods, unless the carrier has notice that the “bailor” lacked such authority.

Commercial Code § 7307(b).

Secured parties with a prior perfected security interest in the goods (and who would be “entitled to the goods” under Commercial Code § 9609) take junior to the carrier when the first component of Commercial Code § 7307(b) applies. That is because Commercial Code § 7307(b) does not, in the terms of Commercial Code § 9333, “provide otherwise,” except when the carrier has notice that the consignor lacked authority to subject the goods to the carrier’s charges.

The second component of Commercial Code § 7307(b) preserves against the carrier’s lien the priority of a perfected Division 9 security interest provided the secured party did not permit the bailor to have control or possession of the goods. In that instance, Commercial Code § 7307(b) does “provide otherwise” in the terms of Commercial Code § 9333. Even if the secured party did allow the bailor such control or possession, the secured party will still prevail if the carrier had notice that the bailor lacked authority to subject the goods to such charges and expenses.

Obligations Secured by the Lien:

The lien created under Commercial Code § 7307(a) secures debts that:

  1. are due to the carrier;
  2. are specifically covered by Commercial Code section 7307, i.e., charges for storage or transportation, including demurrage and terminal charges, and expenses necessary for preservation of the goods incident to their transportation or reasonably incurred in their sale pursuant to law; and
  3. arise subsequent to the date the carrier received the goods. Note that a carrier’s lien does not extend to presently transported goods for prior debts owed to the carrier.

Collateral Subject to the Lien:

The lien created under Commercial Code § 7307 attaches to goods:

  1. specifically covered by the bill of lading; and
  2. in the carrier’s possession.

Classes of Lienor and Lienee Subject to the Lien:

The carrier’s lien is held by a carrier that has transported goods in his possession covered by a bill of lading. The party that is deemed to have granted the lien is the consignor or any person entitled to the goods.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

  1. Prior Carriers. A secured party should satisfy itself through due diligence, review of any bills of lading, and representations/warranties/indemnities from the debtor that none of the property subject to the secured party’s security interest has been delivered to a carrier. If a carrier has received such property, the secured party should confirm that full payment for all related transportation expenses was made, or that the carrier delivered all such property (thereby relinquishing its lien).
  2. Future Carriers. The carrier’s lien is senior to the rights of a secured party unless the carrier has notice: (i) that the consignor lacked authority to subject the goods to such charges and expenses where the carrier is required by law to accept the goods, or (ii) that the bailor does not have authority to take control or possession of the goods where the carrier is not required by law to accept the goods. At least one case holds that knowledge of the existence of another claim on the goods does not defeat the lien provided the carrier is unaware that the bailor lacked authority to dispose of the goods in the normal course of its business. See Olsen v. Santa Barbara’s Gracious Living, Inc., 103 Cal. App. 4th 1377 (2002). The key is whether knowledge of the security interest would impart notice that the carrier did not have authority to ship the goods, or incur freightage costs. See, e.g., National Trailer Convoy Co. v. Mount Vernon National Bank & Trust Co. of Fairfax County, 420 P.2d 889, 3 Commercial Code 831 (Okla. 1966) (carrier charged with notice of certificate of title; underlying contract prohibited removal of trailer absent consent of seller); c.f., Citibank, N.A. v. Sharon Steel Corp. (In re Sharon Steel Corp.), 176 B.R. 384, 389-90 (Bankr. W.D. PA 1995) (even if carrier knew of security interest, same did not prohibit debtor from incurring carrier’s lien in the ordinary course of business).Prohibiting a debtor from shipping its goods may pose practical constraints. In such a case the secured party should include in its documents a covenant by the debtor that the debtor will timely pay all carrier costs. Alternatively, the secured party should: (i) include within its contract documents a covenant not to incur carrier charges or ship covered goods absent the secured party’s written consent; (ii) ensure that notice of its security interest includes these prohibitions; and (iii) obtain from the debtor a list of customary carriers and provide written notice to these parties of such prohibitions.

Miscellaneous:

With respect to additional liens in favor of carriers, see also carrier’s liens arising under Civil Code § 2144 and Civil Code § 3051.5.

b. Carrier’s liens for freightage under Civil Code Section 2144.20

How the Lien is Created:

The lien under Civil Code § 2144 21 arises when a carrier (a) carries freightage or renders services at the request of a shipper or consignee in and about the transportation of property, (b) cares and preserves the property to be transported, (c) advances money at the request of a shipper or consignee to discharge a prior lien on property to be transported, or (d) subject to the limitations specified in Section 3051.6, pays any fines, penalties, costs, expenses and interest arising from the provision of false or erroneous certifications of gross cargo weight as required by Section 508 of Title 49 of the United States Code. However, because the lien arises by operation of law rather than by contract of the parties, the lien does not arise until the time at which the act to be secured by the lien (i.e., payment of the value of the work or labor done and/or materials furnished) ought to be performed.

It is important to understand that the lien of a carrier for freight can be lost by the voluntary surrender of possession of the freight. See Wingard v. Banning, (1870) 39 C. 543 which provides that a carrier’s lien can be lost by the carrier’s voluntary relinquishment of the property.

Perfection of the Lien:

Once the lien has been created, no additional steps are required or permitted in order to perfect the lien.

Priority of the Lien:

Priority vis-à-vis Security Interests Created under the Commercial Code. Commercial Code § 9333(a) provides that a “possessory lien” means an interest, other than a security interest or an agricultural lien which satisfies all of the following conditions: (1) it secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business, (2) it is created by statute or rule of law in favor of the person, and (3) its effectiveness depends on the person’s possession of the goods. A carrier’s lien under Civil Code § 2114 secures payment or performance of an obligation of a shipper or consignee to pay a carrier for shipping property, it is created by statute in favor of the carrier and the carrier’s lien is dependent upon the carrier’s possession of the property on which the lien is enforceable. See Id. Commercial Code § 9333(b) provides that a possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise. Civil Code § 2114 does not expressly provide otherwise. Therefore, the possessory carrier’s lien in a shipper or consignee’s goods arising under Civil Code § 2114 has priority over a security interest in goods created under the Commercial Code. However, as noted above, the carrier must maintain possession of the property or the carrier’s lien will extinguish under Civil Code § 2913.

Priority vis-à-vis Other Liens. Civil Code § 2897 generally provides that “[o]ther things being equal, different liens upon the same property have priority according to the time of their creation.” Although security interests do constitute “liens” under the general definition contained in Civil Code § 2872, this priority scheme does not apply to security interests: Civil Code § 2914 specifically provides that none of the provisions contained in Civil Code §§ 2872 through 2914 apply to a security interest governed by the Commercial Code. Instead, this priority scheme applies solely to liens created under statutes or rules of law other than the Commercial Code.

The Obligations Secured by the Lien:

The obligations secured by the lien include (a) the amount owed to the carrier by the shipper or consignee for the transportation of the freight and other services rendered at the request of the shipper or consignee, (b) the amounts owed to the carrier for the costs of care and preservation of the property, (c) money advanced at the request of the shipper or consignee to discharge a prior lien, and (d) subject to the limitations specified in Civil Code § 3051.6, any fines, penalties, costs, expenses, and interest arising from the provision of false or erroneous certifications of gross cargo weight as required by Section 508 of Title 49 of the United States Code.

The Property Subject to the Lien:

The property subject to the lien consists of the property transported by the carrier.

The Classes of Lienor and Lienee Subject to the Lien:

Lienor. The lienor is a carrier that either (a) renders services at the request of a shipper or consignee in and about the transportation of property, (b) cares and preserves the property to be transported, (c) advances money at the request of a shipper or consignee to discharge a prior lien on property to be transported, or (d) subject to the limitations specified in Section 3051.6, pays any fines, penalties, costs, expenses and interest arising from the provision of false or erroneous certifications of gross cargo weight as required by Section 508 of Title 49 of the United States Code.

Lienee. The lienee is a shipper or consignee of property who requests the carrier to transport such property.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Protection Against Prior Carrier’s Liens Arising Under Civil Code § 2144. In any transaction in which a secured party intends to take a security interest in personal property of a debtor, including, without limitation, goods, inventory and equipment, the primary way for the secured party to protect itself against the carrier’s lien arising under Civil Code § 2144 is either (a) to confirm through appropriate due diligence that none of the debtor’s property has been delivered by the debtor or debtor’s agent to a carrier for the purpose of transporting the property, or (b) if it appears that any of the debtor’s property has been delivered to a carrier for that purpose, to either (i) confirm with the carrier that the carrier has been paid in full for all services rendered by the carrier, (ii) confirm that the carrier has voluntarily relinquished possession of all such property, or (iii) if the carrier still has possession of the debtor’s property, confirm or secure appropriate waivers or releases of the carrier’s lien from such carrier. Of course, appropriate representations, warranties and indemnities (among other contractual provisions) may also prove useful in providing a measure of protection to the secured party.

Protection Against Future Liens Arising Under Civil Code § 2144. Because the carrier’s lien arising under Civil Code § 2144 is always prior to a security interest created under the Commercial Code so long as the carrier has possession of the property on which the carrier asserts the lien (regardless of when the security interest attaches or becomes perfected), the only practical way that a secured party can prevent any of the debtor’s property from becoming subject to the carrier’s lien as a result of actions taken in the future by the debtor is to include, among other contractual provisions, appropriate covenants by the debtor in the relevant transaction documents such as covenants to promptly pay any carrier for all services performed by the carrier. Ultimately, however, such covenants cannot prevent the debtor from breaching its agreement with the secured party and subjecting the debtor’s property to a carrier’s lien arising under Civil Code § 2144. As noted above, such lien will be prior in right to the security interest in favor of the secured party, but the secured party would have a claim against the debtor for breaching its covenants.

c. Common carrier’s lien on luggage under Civil Code Section 2191.

[TO BE ADDED IN SUBSEQUENT DRAFT]

4. Other Liens for Services.

a. Liens Arising under Civil Code Section 3051.22

How the Lien is Created:

The lien arising under Civil Code § 3051 arises when any person provides certain specific services to the owner of such property. Such lien is dependent on possession of the articles of personal property on which the lien is claimed. The person providing the services may retain possession of the property until the person’s reasonable charges are paid. It is important to understand that the liens arising under Civil Code § 3051 are dependent on possession of the property and can be lost by voluntary relinquishment of the property.

Perfection of the Lien:

Once the lien has been created, no additional steps are required or permitted in order to perfect the lien.

Priority of the Lien:

Priority vis-à-vis Security Interests Created under the Commercial Code. First, Commercial Code § 9333(a) provides that a “possessory lien” means an interest, other than a security interest or an agricultural lien which satisfies all of the following conditions: (1) it secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business, (2) it is created by statute or rule of law in favor of the person, and (3) its effectiveness depends on the person’s possession of the goods. A lien arising under Civil Code § 3051 secures payment or performance of an obligation of the owner of property to pay any person who has provided the applicable services to the owner with respect to the property described therein, it is created by statute in favor of the person providing the services and the liens arising under Civil Code § 3051 are dependent upon the possession of the property on which the lien is claimed by the person providing the services. Commercial Code § 9333(b) provides that a possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise. Civil Code § 3051 does not expressly provide otherwise. Therefore, the possessory liens in an owner’s property arising under Civil Code § 3051 have priority over a security interest in goods created under the Commercial Code. However, as noted above, the persons claiming such lien must maintain possession of the property or the lien arising under Civil Code § 3051 will extinguish.

Second, Commercial Code § 9201 provides in part that a transaction subject to Division 9 of the Commercial Code is subject to the applicable provisions of Title 14 of Part 4 of Division 3 of the Civil Code. As noted above, these provisions include Civil Code § 3051. Commercial Code § 9201 also provides that in the event of a conflict between Division 9 of the Commercial Code and one of the above provisions, the latter will control. Nothing in Civil Code § 3051 or in any of the general provisions applicable thereto permits a security interest created under the Commercial Code to obtain priority over a lien created under Section 3051 of the Civil Code. Accordingly, it appears that a lien created under Civil Code § 3051 will always have priority over a security interest in the same property created under the Commercial Code.

Priority vis-à-vis Other Liens. Civil Code § 2897 generally provides that “[o]ther things being equal, different liens upon the same property have priority according to the time of their creation.” Although security interests do constitute “liens” under the general definition contained in Civil Code § 2872, this priority scheme does not apply to security interests: Civil Code § 2914 specifically provides that none of the provisions contained in Civil Code §§ 2872 through 2914 apply to a security interest governed by the Commercial Code. Instead, this priority scheme applies solely to liens created under statutes or rules of law other than the Commercial Code.

The Obligations Secured by the Lien:

The obligations secured by the liens arising under Civil Code § 3051 are the compensation, if any, which is due from the owner of the property to the person providing the applicable services. With respect to services for the protection, improvement, safekeeping or carriage of property, the lien secures the compensation, if any, which is due to the service provider from the owner for such service. With respect to making, altering or repairing of an article of personal property, the lien secures the reasonable charges for the balance due
for such work done and materials furnished. With respect to liens by foundry proprietors and persons conducting a foundry business, the lien secures the balance due them from customers for foundry work. With respect to services provided by plastic fabricators and persons conducting a plastic fabricating business, the lien secures the balance due them from the customer for plastic fabrication work. With respect to laundry proprietors and persons conducting a laundry business, and dry cleaning establishment proprietors and persons conducting a dry cleaning establishment, the lien secures the balance due them from such customer for laundry work or dry cleaning work. With respect to veterinary proprietors and veterinary surgeons, the lien secures their compensation in caring for, boarding, feeding, and medical treatment of animals.

The Property Subject to the Lien:

The collateral subject to the lien arising under Civil Code § 3051 includes the following with respect to which the services are provided:

  • Any article of personal property on which a person provides any service to the owner thereof for the protection, improvement, safekeeping or carriage thereof;
  • Any article of personal property which a person makes, alters, or repairs at the request of the owner or legal possessor of the property;
  • All patterns belonging to the customer of a foundry proprietor and persons conducting a foundry business in the hands of such foundry proprietor and persons conducting a foundry business;
  • All patterns and molds belonging to the customer of a plastic fabricator and persons conducting a plastic fabricating business in the hands of such plastic fabricator and person conducting a plastic fabricating business;
  • All personal property belonging to the customer of a laundry proprietor and persons conducting a laundry business and dry cleaning establishment, proprietors and persons conducting a dry cleaning establishment in the hands of such laundry proprietor and persons conducting a laundry business and dry cleaning establishment;
  • All animals in the hands of a veterinary proprietor and veterinary surgeon.

The Classes of Lienor and Lienee Subject to the Lien:

Lienor. The classes of lienor who can claim the lien arising under Civil Code § 3051 include the following:

  • Any person who provides any service to the owner thereof for the protection, improvement, safekeeping or carriage thereof;
  • Any person who makes, alters, or repairs at the request of the owner or legal possessor of the property;
  • Any foundry proprietor and persons conducting a foundry business;
  • Any plastic fabricator and person conducting a plastic fabricating business;
  • Any laundry proprietor and persons conducting a laundry business and dry cleaning establishment proprietors and persons conducting a dry cleaning establishment in the hands of such laundry proprietor;
  • Any veterinary proprietor and veterinary surgeon.

Lienee. The lienee is the owner of the property on which the applicable services are provided and, in the case of liens arising in favor of a person who makes, alters, or repairs at the request of the owner or legal possessor of the property, the legal possessor of the property as well as the owner.

Non-application of Section 3051. Section 3051 is inapplicable to:

  • Any vessel, as defined in Section 21 of the Harbors and Navigation Code, to any vehicle, as defined in Section 670 of the Vehicle Code, which is subject to registration pursuant to that code;
  • Any manufactured home, as defined in Section 18007 of the Health and Safety Code;
  • Any mobile home, as defined in Section 18008 of the Health and Safety Code;
  • Any commercial coach, as defined in Section 18001.8 of the Health and Safety Code, whether or not the manufactured home, mobile home, or commercial coach is subject to registration under the Health and Safety Code.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Protection Against Prior Liens Arising Under Civil Code § 3051. In any transaction in which a secured party intends to take a security interest in personal property of a debtor, including, without limitation, goods, inventory and equipment, the primary way for the secured party to protect itself against the lien arising under Civil Code § 3051 is either (a) to confirm through appropriate due diligence that none of the debtor’s property has been delivered by the debtor, the debtor’s agent or a legal possessor of the debtor’s property to one of the classes of persons entitled to a lien on such property under Civil Code § 3051, or (b) if it appears that any of the debtor’s property has been delivered to someone entitled to a lien on such property under Civil Code § 3051, to either (i) confirm with the person who has provided the service, that the person providing such service has been paid in full for all such services, (ii) confirm that the person providing such service has voluntarily relinquished possession of all property on which such person could claim such a lien, or (iii) if the person providing such service still has possession of the debtor’s property, confirm or secure appropriate waivers or releases of this lien from such person. Of course, appropriate representations, warranties and indemnities (among other contractual provisions) may also prove useful in providing a measure of protection to the secured party.

Protection Against Future Liens Arising Under Civil Code § 3051. Because the liens arising under Civil Code § 3051 will always be superior to a security interest created under the Commercial Code so long as the person providing the applicable service has possession of the property on which the person asserts the lien (regardless of when the security interest attaches or becomes perfected), the only practical way that a secured party can prevent any of the debtor’s property from becoming subject to the lien arising under Civil Code § 3051 as a result of actions taken in the future by the debtor is to include, among other contractual provisions, appropriate covenants by the debtor in the relevant transaction documents such as covenants to promptly pay any person for all services performed with respect to the debtor’s property. Ultimately, however, such covenants cannot prevent the debtor from breaching its agreement with the secured party and subjecting the debtor’s property to a lien arising under Civil Code § 3051. As noted above, such lien will be prior in right to the security interest in favor of the secured party, but the secured party would have a claim against the debtor for breaching its covenants.

Miscellaneous:

With respect to additional liens in favor of carriers providing carriage services, see also carrier’s liens arising under Civil Code § 2144, Civil Code § 3051.5 and Commercial Code § 7307.

b. Lien Under Civil Code Section 3051.5.23

Civil Code § 3051.5 provides another carrier’s lien on freight in the carrier’s possession. Under this section, a carrier has a lien on freight in its possession for the total amount owed the carrier by the shipper for freightage, charges for services and advances due on freight previously delivered upon the promise of the shipper to pay freightage, charges and advances, as provided in this section.

How the Lien is Created:

The lien provided by this section does not arise (A) unless the carrier has notified the shipper, in writing, that failure to pay billed charges may result in a lien on future shipments, including the cost of storage and appropriate security for the subsequent shipment held pursuant to this section, and (B) as to any freight which consists of perishable goods
.

Perfection of the Lien:

No additional steps are required to perfect the lien.

Priority of the Lien:

Any perfected security interest in the property is prior to the lien provided by Civil Code § 3051.5. In addition, no sale of the property may be concluded if the amount bid at the sale is not at least equal to the total amount of all outstanding obligations secured by a perfected security interest in the property.

The Obligations Secured by the Lien:

The obligations secured by the lien are the total amount owed to the carrier by the shipper, charges for services and advances due on freight previously delivered upon the promise of the shipper to pay freightage, charges and advances.

Collateral Subject to the Lien:

The collateral subject to the carrier’s lien arising under Civil Code § 3051.5 is the freight in the carrier’s possession.

Classes of Lienor/Lienee Subject to the Lien:

The classes of lienor/lienee subject to the lien are the carrier and the shipper.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

There are very specific requirements for the sale of property subject to a lien arising under Civil Code § 3051.5. A secured creditor with a perfected security interest in the property covered by a lien arising under Civil Code § 3051.5 would have a lien that is superior to the lien in such property arising under Civil Code § 3051.5 so it would not need to take any additional steps to protect itself against such lien.

c. Limitation on lien of electronic and appliance repair dealers under Bus. & Prof. Code Section 9852.

[TO BE ADDED IN SUBSEQUENT DRAFT]

d. Hotelkeeper’s lien under Civil Code Section 1861.

[TO BE ADDED IN SUBSEQUENT DRAFT]

e. Apartment keeper’s lien under Civil Code Section 1861a.

[TO BE ADDED IN SUBSEQUENT DRAFT]

f. Lien for provision of health services under Civil Code Section 3040.

[TO BE ADDED IN SUBSEQUENT DRAFT]

g. Hospital lien for emergency and ongoing services under Civil Code Section 3045.1.

[TO BE ADDED IN SUBSEQUENT DRAFT]

h. Jeweler’s Lien under Civil Code Section 3052a.

[TO BE ADDED IN SUBSEQUENT DRAFT]

i. Lien of Mining Claimant under Civil Code 3060.

[TO BE ADDED IN SUBSEQUENT DRAFT]

j. Thresherman’s lien under Civil Code Section 3061.

[TO BE ADDED IN SUBSEQUENT DRAFT]

k. Logger’s and Lumberman’s Liens under Civil Code Section 3065.

[TO BE ADDED IN SUBSEQUENT DRAFT]

l. Cleaner’s and Launderer’s Lien under Civil Code Section 3066.

[TO BE ADDED IN SUBSEQUENT DRAFT]

m. Mechanic’s Lien under Civil Code Sections 3110-3112.

[TO BE ADDED IN SUBSEQUENT DRAFT]

n. Factor’s lien under Civil Code Section 3053.24

How the Lien Arises/Attaches:

A factor (also known as a commissions merchant or consignee) possesses the principal’s merchandise and has the power to sell it. If the factor sells the goods on behalf of the principal, the factor remits the sales proceeds, less a commission, to the principal. Section 3053 of the Civil Code grants to a factor a general lien for all that is due to the factor upon all articles of commercial value entrusted to the factor by the same principal.

Perfection of the Lien:

A factor’s lien is a possessory lien. The factor must possess the goods or their proceeds in order for the lien to attach.

Priority of the Lien:

A factor’s lien is a possessory lien under Section 9333(a) of the Commercial Code. Because the Civil Code is silent as to priority, under Section 9333(b) of the Commercial Code, the factor’s lien has priority over a security interest in the goods (unless the lien is created by a statute that expressly provides otherwise).

Obligations Secured by the Lien:

A factor has a general lien on the goods in his or her possession for all commissions and other sums (typically advances) owed to the factor by his or her principal.

The Collateral Subject to the Lien:

The lien attaches to all property entrusted to the factor by the principal.

The Classes of Secured Creditors and Debtors Subject to the Lien:

Secured creditors who take tangible personal property (consumer goods, equipment, inventory, or farm products) as collateral are subject to this lien.

Debtors who entrust personal property for sale are subject to this lien.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

In general, a secured creditor may perfect a security interest in tangible personal property by possession under Section 9313 of the Commercial Code. Possession of the collateral by someone other than the debtor gives the same constructive notice to others that the filing of a financing statement affords. Therefore, a secured creditor can maintain its priority or protect its security interest against the factor’s lien by taking the same action it would take to protect against a possessory security interest — verify that the debtor actually possesses the collateral.

o. Lien for Aircraft Repairs under Business & Professions Code Section 9798.1.25

Statutory Framework:

Business & Professions Code § 9798.1 provides as follows:

Subject to the provisions set forth in this chapter, each repairperson shall have a special lien pursuant to Sections 2872 and 2875 of the Civil Code, upon the civil aircraft, engine, or aircraft appliance upon which the repairperson has bestowed labor or furnished material. The special lien shall be in an amount equal to the agreed upon value of the labor and material furnished, or in the absence of any agreement, for the reasonable value thereof.

How the Lien Arises/Attaches:

This lien under Business & Professions Code § 9798.1 is created by written contract between the parties but only if the written contract is signed by the customer, and predates the commencement of work for which the lien is applicable. Such lien is not dependent upon possession by the repairperson of the property which is the subject of the lien. In order to claim a lien, the repairperson who has repaired the aircraft, engine, aircraft propeller or aircraft appliance must have complied with all of the provisions of Business & Professions Code § 9793 (regarding required authorization of repairs and written estimates), Section 9794 (authority for unforeseen work), Section 9795 (requirements for invoices), Section 9796 (requirement for the repairperson’s business class=”anchor” name and address to appear on the invoice), Section 9797 (requirements for work done on a time and materials basis) and Section 9798 (applicability of these rules to an aircraft in distress in need of immediate work critical to its preservation and safety). Further, the repairperson must also either be insured for liability or be the holder of a written surety bond predating the commencement of the work for which the lien is applicable.

Perfection of the Lien:

The statutory lien arising under Business & Professions Code § 9798.1 must be recorded at the FAA Aircraft Registry in accordance with Business & Professions Code § 9798.2. Business & Professions Code § 9798.2 provides that the statutory lien created by Business & Professions Code § 9798.1 is not valid unless and until it is recorded with the FAA Aircraft Registry pursuant to the form of notice of lien set forth in Chapter 19.5 of the California Business & Professions Code. No notice of lien is valid unless it is presented for recording at the FAA Registry within 180 days of completion of the work giving rise to the lien.

Priority of the Lien:

The U.S. Supreme Court recognized in Philko Aviation v. Shacket, 462 U.S. 406, 103 S.Ct. 2476, 76 L.Ed 2d 678 (1983), that although perfection of title to aircraft as well as interests in aircraft is governed and pre-empted by the Federal Aviation Act, priority among conflicting interests is governed by reference to state law. Therefore, the law of each state where work is performed on an aircraft must be reviewed with respect to this issue to make a determination as to whether the mechanic’s lien will have priority over an aircraft security interest previously filed with the FAA. However, with respect to work performed on aircraft in the State of California, as described in more detail below, if the aircraft security interest is filed with the FAA before the repairman’s lien is filed with the FAA, then the aircraft security interest will have priority over the repairman’s lien arising under Business & Professions Code § 9798.1 if all other factors are equal. Of course, the facts and circumstances of each situation should be carefully reviewed before a final determination is made.

Business & Professions Code § 9798.4, subdivision (b) provides that the time of creation of the lien shall be the time that the FAA Aircraft Registry actually records the notice of lien described in Business & Professions Code § 9798.2. Therefore, the time that this lien attaches (i.e., is created) is the same time that it is perfected. Business & Professions Code § 9798.4, subdivision (a) provides that the priority of liens set forth in that section supersedes the priority otherwise set forth in Civil Code § 2897. Civil Code § 2897 generally provides that, all other things being equal, different liens upon the same property have priority according to the time of their creation, except in cases of bottomry and respondentia. Business & Professions Code § 9798.4, subdivisions (c) and (d) provide for different priority with respect to the subcategories of repairpersons, but do not change the priority of repairpersons with respect to other lienholders such as the holder of an aircraft security interest filed with the FAA Aircraft Registry. Therefore, since Business & Professions Code § 9798.4 did not change the priority otherwise set forth in Civil Code § 2897 with respect to the priority of repairpersons with respect to holders of aircraft security interests filed with the FAA Aircraft Registry, then the general rules of Civil Code § 2897 would apply and different liens on the same aircraft will have priority according to the time of their creation. One California case was found on this issue. In re Veterans’ Air Express Co., 76 F. Supp. 684 (1948), the court held that a chattel mortgage lien (previous description of a document similar to an aircraft security interest) under the Civil Aeronautic Act (predecessor to the Federal Aviation Act) is senior to a compensatory lien for repairs made on the property mortgaged after recordation of the mortgage.

Based on the foregoing, if an aircraft security interest is recorded with the FAA Aircraft Registry prior to the time that a lien from a repairman arising under Business & Professions Code § 9798.1 is recorded with the FAA Aircraft Registry pursuant to Business & Professions Code §§ 9798.1, et seq., then the lender’s properly perfected aircraft security interest will have priority over the repairman’s lien.

The Obligations Secured by the Lien:

The lien created under Business & Professions Code § 9798.1 secures the obligation owed to each repairperson who has bestowed labor or furnished material on the subject collateral, and is in an amount equal to the agreed upon value of the labor and material furnished, or in the absence of any agreement, for the reasonable value thereof.

The Collateral Subject to the Lien:

The lien created under Business & Professions Code § 9798.1 is applicable to any civil aircraft engine, aircraft propeller or aircraft appliance which is capable of having the ownership, or an interest in the ownership, affected by a conveyance, recorded at the FAA Aircraft Registry.

The Classes of Secured Party/Debtor Subject to the Lien:

  1. Secured parties who take this type of collateral as security are subject to the hidden lien arising under Business & Professions Code § 9798.1.
  2. Debtors who own this type of property are subject to the lien arising under Business & Professions Code § 9798.1.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Aircraft lenders can obtain priority over the lien created under Business & Professions Code § 9798.1 and protect themselves against this hidden lien by (a) performing a search of the FAA Aircraft Registry immediately prior to funding their loan to confirm that there are no other liens on the aircraft including, without limitation, repairmen’s liens arising under Business & Professions Code § 9798.1, (b) performing a search of the applicable Secretary of State’s Commercial Code filing records prior to funding their loan to confirm that there are no other liens on any of the removable aircraft parts that are not subject to recording with the FAA Aircraft Registry, (c) requiring their borrowers to represent and warrant that all costs of maintenance and repair for the aircraft have been paid in full as of the date the loan is funded, and (d) reviewing the logbooks for the aircraft and requiring any and all maintenance and repair providers who have maintained or repaired the aircraft within 180 days of the funding date to confirm in writing that they have been paid in full.

Miscellaneous:

The lien created under Business & Professions Code § 9798.1 is in addition to (a) the statutory liens created pursuant to Civil Code § 3051, and (b) the statutory lien created pursuant to Chapter 5 (commencing with Section 1208.61) of Title 4 of Part 3 of the Code of Civil Procedure, if in each case the repairperson is a certified repair station, a certified mechanic or a fixed-base operator.

The lien created under Business & Professions Code § 9798.1 appears to be a lien that could be created in addition to or in lieu of a general repairman’s possessory lien that could be filed with respect to aircraft repairs.

p. State Lien In Connection With The Operation Of Airport Or Air Navigation Facility By State (Arising Under Public Utilities Code Section 21640).26

How the Lien Arises/Attaches:

This lien is applicable to any personal property which has been the subject of repair, improvement, storage or care pursuant to the statute. Public Utilities Code § 21640 does not proscribe any additional actions or filings to be undertaken or made by the State of California or the California Department of Transportation, nor does it require the State of California or the California Department of Transportation to comply with any obligations in connection with such repair, improvement, storage or care of such personal property for the lien to attach. Unlike similar statutory liens for repairs and storage, the lien arising under Public Utilities Code § 21640 is not dependent on possession of the personal property by the State of California. It is important to note that the State of California is the only entity or person provided the benefit of this lien and that the lien only arises in those circumstances where the services were performed in connection with the California Department of Transportation’s operation of an airport or air navigation facility owned or operated by the State of Califor
nia.

Perfection of the Lien:

Under Public Utilities Code § 21640 no additional steps are required for perfecting the lien on the personal property. However, it should be noted that for certain types of personal property, the issue of perfection may be governed by federal law based on federal pre-emption of state law. For example, under the Federal Aviation Act, perfection of a lien in aircraft is achieved by recording such lien at the FAA Aircraft Registry.

Priority of the Lien:

The relative priority of the lien established under Public Utilities Code § 21640 is not specifically provided for in the statute. Civil Code § 2897 generally provides that, all other things being equal, different liens on the same property have priority according to the time of their creation, except in cases of bottomry and respondentia. Since Public Utilities Code § 21640 does not change the priority rules otherwise set forth in Civil Code § 2897, priority between competing liens would be based on the time of the creation of such liens.

The Commercial Code contains no provision providing for the relative priority between a perfected security interest created thereunder and a non-possessory lien on personal property created by a non-Commercial Code statute. While Section 9333 of the Commercial Code sets forth the priority of liens arising by operation of law that are deemed to be “possessory liens” thereunder, the lien created under Public Utilities Code § 21640 is not dependent on possession of the personal property and therefore would not be governed by Section 9333. Though there is no case law interpreting Public Utilities Code § 21640 or the priority of liens created thereby, courts, in interpreting similar statutory liens, tend to equate the perfection of a security interest under the Commercial Code with the creation of a non-Commercial Code lien under statute, and then apply the concept of temporal priority, giving priority to the interest which was the first to be perfected or to be created, without regard to the source of the law under which the interest was perfected or created. It should be noted that courts have made an exception to this temporal priority rule in cases where there is strong public policy to favor the non-Commercial Code interest.

Based on the foregoing, assuming a court does not find a strong public policy reason to favor the lien created under Public Utilities Code § 21640 in favor of the State of California, it is likely that a security interest that is properly perfected under the Commercial Code prior to the time that a lien is created under Public Utilities Code § 21640 will have priority over such non-Commercial Code lien.

The Obligations Secured by the Lien:

The lien created under Public Utilities Code § 21640 secures the charges owed to the California Department of Transportation or its agents for repairs, improvements, storage, or care of personal property in connection with the operation of an airport or air navigation facility owned or operated by the State of California.

The Collateral Subject to the Lien:

The lien created under Public Utilities Code § 21640 is applicable to any personal property.

The Classes of Secured Party/Debtor Subject to the Lien:

  1. Secured parties who take as collateral any personal property which may have been repaired, improved, stored or cared for by the California Department of Transportation in connection with the operation of an airport or air navigation facility owned or operated by the State of California are subject to the hidden lien arising under Public Utilities Code § 21640.
  2. Debtors who own personal property are subject to the lien arising under Public Utilities Code § 21640 when repair, improvement, storage or care is provided with respect to such personal property by the California Department of Transportation in connection with the operation of an airport or air navigation facility owned or operated by the State of California.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Personal property lenders can reduce the risk associated with this hidden lien by (a) requiring their borrowers to represent and warrant that all costs for repair, improvement, storage or care of personal property has been paid in full as of the date the loan is funded, (b) requiring their borrowers to covenant that all costs for repair, improvement, storage or care of personal property will at all times be paid in full, and (c) reviewing the records detailing the location and transportation of personal property to determine whether it is likely that unpaid charges are owed to the California Department of Transportation for storage or care of personal property located at an airport. Also, given the limited class of persons protected by the lien and the fact that the lien arises in connection with airport operations, if the borrower holds personal property consisting of aircraft, the lender may want to perform a search of the FAA Aircraft Registry immediately prior to funding its loan to confirm that there are no liens on aircraft, including, without limitation, liens arising under Public Utilities Code § 21640.

Miscellaneous:

The lien created under Public Utilities Code § 21640 appears to be in addition to any statutory liens that may be created in favor of the State of California pursuant to Civil Code § 3051, Business & Professions Code § 9798.1 and other statutes granting repairman, warehouseman and similar applicable liens.

q. Customs broker’s lien (Arising Under 19 U.S.C. Section 1564 (2005), As Amended).27

Statutory Framework:

19 U.S.C. § 1564 (2009) provides as follows (the “Customs Lien”):

Whenever a customs officer shall be notified in writing of the existence of a lien for freight, charges, or contribution in general average upon any imported merchandise sent to the appraiser’s store for examination, entered for warehousing or taken possession of by him, he shall refuse to permit delivery thereof from public store or bonded warehouse until proof shall be produced that the said lien has been satisfied or discharged. The rights of the United States shall not be prejudiced or affected by the filing of such lien, nor shall the United States or its officers be liable for losses or damages consequent upon such refusal to permit delivery. If merchandise, regarding which such notice of lien has been filed, shall be forfeited or abandoned and sold, the freight, charges, or contribution in general average due thereon shall be paid from the proceeds of such sale in the same manner as other lawful charges and expenses are paid therefrom. The provisions of this section shall apply to licensed customs brokers who otherwise possess a lien for the purposes stated above upon the merchandise under the statutes or common law, or by order of any court of competent jurisdiction, of any State.

Definitions:

“bonded warehouse” means an enclosure designated by the Secretary of the Treasury as a bonded warehouse for the storage of imported merchandise entered for warehousing, or taken possession of by the appropriate customs officer, or under seizure, or for the manufacture of merchandise in bond, or for the repacking, sorting, or cleaning of imported merchandise. Such warehouses may be bonded for the storing of such merchandise only as shall belong or be consigned to the owners or proprietors thereof and be known as private bonded warehouses, or for the storage of imported merchandise generally and be known as public bonded warehouses. Before any imported merchandise not finally released from customs custody shall be stored in any such premises, the owner or lessee thereof shall give a bond in such sum and with
such sureties as may be approved by the Secretary of the Treasury to secure the Government against any loss or expense connected with or arising from the deposit, storage, or manipulation of merchandise in such warehouse. 19 U.S.C. § 1555(a) (2009).

“charges” means the charges due to or assumed by the claimant of the lien which are incident to the shipment and forwarding of the goods to the destination in the United States, but does not include the purchase price, whether advanced or to be collected, nor other claims not connected with the transportation of the goods. 19 C.F.R § 141.112(a)(2).

“customs broker” is a person granted a customs broker’s license by the Secretary of the Treasury pursuant to either (i) 19 U.S.C. § 1641(b)(2) (2009) (for individual citizens of the United States), or (ii) 19 U.S.C. § 1641(b)(3) (2009) (for corporations, associations, or partnerships that are organized or existing under the laws of any of the several States of the United States). 19 U.S.C. § 1641 (2009).

“customs officer” means any officer of the Customs Service or any commissioned, warrant, or petty officer of the Coast Guard, or any agent or other person, including foreign law enforcement officers, authorized by law or designated by the Secretary of the Treasury to perform any duties of an officer of the Customs Service. 19 U.S.C. § 1401(i) (2009).

“Customs Regulations” means Title 19 of the Code of Federal Regulations.

“Customs Service” means the United States Customs Service of the Treasury Department. 19 U.S.C. § 1401(i) (2009).

“freight” means the charges for the transportation of the goods from the place of shipment in the foreign country to the final destination in the United States. 19 C.F.R § 141.112(a)(1).

“general average ” means the liability to contribution of the owners of a cargo which arises when a sacrifice of a part of such cargo has been made for the preservation of the residue or when money is expended to preserve the whole. It only arises from actions impelled by necessity. 19 C.F.R § 141.112(a)(3).

“merchandise” means goods, wares, and chattels of every description, and includes merchandise the importation of which is prohibited, and monetary instruments as defined in Section 5312 of Title 31, 19 U.S.C. § 1401(c)(2009).

“Tariff Act” means Chapter 4 of Title 19 of the United States Code. Also known as the Tariff Act of 1930.

“vessel” includes every description of water craft or other contrivance used, or capable of being used, as a means of transportation in water, but does not include aircraft. 19 U.S.C. § 1401(a) (2009).

Perfection of the Customs Lien:

Notice of lien. A notice of lien for freight, charges, or contribution in general average must be filed with the port director on Customs Form 3485, signed by the authorized agent of the claimant and certified by him. 19 C.F.R. § 141.112(b) (2009).

Preliminary notice of lien for contribution in general average. When the cargo of a vessel is subject to contribution in general average, a preliminary notice thereof may be filed with the port director and individual notices of lien filed thereafter. Upon receipt of a preliminary notice, the port director shall withhold release of any merchandise imported in the vessel for two (2) days (exclusive of Sunday and holidays) after such merchandise is taken into Customs custody, unless proof is submitted that the claim for contribution in general average has been paid or secured. 19 C.F.R. § 141.112(c) (2009).

Merchandise entered for immediate transportation. A notice of lien upon merchandise entered for immediate transportation must be filed by the claimant with the port director at the destination. 19 C.F.R. § 141.112(d) (2009).

Limitations on acceptance of notice of lien. A notice of lien shall be rejected and returned with the reason for rejection noted thereon if it is filed after any of the following actions have been taken concerning the merchandise: (a) release from Customs custody; (b) forfeiture under any provision of law; (c) sale as unclaimed or abandoned merchandise under 19 U.S.C. § 1491 or § 1559 (2009); or (d) receipt and acceptance of a notice of abandonment to the Government under 19 U.S.C. § 1506(1) or § 1563(b) (2009) 19 C.F.R. § 141.112(e) (2009).

Forfeited or abandoned merchandise. The acceptance of a notice of lien shall not in any manner affect the order of disposition and accounting for the proceeds of sales of forfeited and abandoned property provided for in Subpart D of part 127 and Sections 158.44 and 162.51 of the Customs Regulations. 19 C.F.R. § 141.112(f) (2009).

Bond may be required. When any doubt exists as to the validity of a lien filed with the port director, the port director may require a bond on Customs Form 301, containing the bond conditions set forth in Section 113.62 of the Customs Regulations, to hold the port director harmless from any liability which may result from withholding the release of the merchandise. 19 C.F.R. § 141.112(g) (2009).

Priority of the Customs Lien:

Commercial Code § 9109(c)(1) provides that Division 9 does not apply to the extent that a statute, regulation, or treaty of the United States preempts the division. Comment 8 to Commercial Code § 9109 provides:

Federal Preemption. Former Commercial Code § 9104(a) excluded from Division 9 “a security interest subject to any statute of the United States, to the extent that such statute governs the rights of parties to and third parties affected by transactions in particular types of property.” Some (erroneously) read the former section to suggest that Division 9 sometimes deferred to federal law even when federal law did not preempt Division 9. Commercial Code § 9109(c)(1) recognizes explicitly that Division 9 defers to federal law only when and to the extent that it must — i.e., when federal law preempts it.

All merchandise coming into the United States must clear Customs and is subject to a Customs duty unless specifically exempted by law. See generally 19 C.F.R. § 141.0, et seq. (2009). Clearance involves a number of steps: entry, inspection, classification, appraisement and liquidation. Id. The effect of warehousing goods is to place them in the possession of the United States, and no lien thereon can be obtained by an execution creditor. In re Johnston, 13 F.Cas. 881, No. 7424 (W.D.Pa. 1878). But, the importer is constructively in possession of the goods subject to the lien for duties, and such goods are, notwithstanding the government’s custody and lien, subject to sale and transfer of the right to possession when the duties are paid. Waldron v. Romaine, 22 N.Y. 368, 1860 WL 7911 (1860). Moreover, a bonded warehouse must exercise “reasonable care” to ensure that deposited goods are disposed of in accordance with all applicable Customs regulations. See Ameritrade Corp. v. Carnes, 831 F.2d 260, 261 (Fed. Cir. 1987). (“Although the Customs Service Regulation does not hold warehouse proprietors strictly liable for any violations that may occur, there is an expectation of reasonable care in operating under a bonded warehouse license.”)

Since federal law governs the importation and entry of goods into the United States, Commercial Code § 9109(c)(1) removes the Customs Lien from Division 9. Therefore, the Customs Lien is granted priority. Furthermore, the Tariff Act does not permit the customs officer to deliver the merchandise until he receives proof that the Customs Lien has been satisfied. Proof that the Customs Lien has been satisfied or discharged must consist of a written release or receipt signed by the claimant and filed with the port director, showing payment of the claim in full. 19 C.F.R. § 141.112(h) (2009). As a practical matter, the Tariff Act provides the claimant a super-priority since the merchandise is not released unless the claimant is paid.

The Obligations Secured by the Customs Lien:

The lien created under 19 U.S.C. § 1564 secures the obligation to pay freight, charges, or contribution in general average to the claimant.

The Collateral Subject to the Customs Lien:

The Customs Lien is applicable to any imported merchandise pending clearance through Customs.

The Classes of Secured Party/Debtor Subject to the Customs Lien:

  1. Secured parties who take as collateral goods imported into the United States not yet cleared through Customs.
  2. Debtors who import goods into the United States.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Lenders can protect themselves against a Customs Lien by (a) verifying with the port director that a Notice of Lien has not been delivered; (b) verifying with the carrier that all freight, charges and contribution in general average have been paid; and (c) requiring their borrowers to represent and warrant that all freight, charges and contribution in general average have been paid in full as of the date the loan is funded.

r. Design professional’s lien under Civil Code Section 3081.4. 28

Statutory Framework:

California Civil Code § 3081.4 permits (a) a “design professional” who, (b) even after notice and an opportunity to cure, (c) has not been paid an agreed fee for services, (d) pursuant to a contract, (e) with a landowner, (f) for a real-estate improvement project on the land, (g) where the project has been issued a building permit or other required governmental approval, to create a short-term lien on the land by recording a specified notice of lien.

How the Lien Arises/Attaches:

The lien arises under California Civil Code § 3081.4 when the design professional — after default by the landowner and notice and opportunity to cure — records a notice of lien in the office of the county recorder in the county in which the real property or some portion of it is located. The notice of lien must include specific identifying information about (i) the design professional, (ii) the amount of the lien, (iii) the real property being attached and its current owner of record, and (iv) the building permit or other governmental approval for the work of improvement.

Under California Civil Code § 3081.2, the lien does not arise, and the design professional may not file a notice of lien, if a building permit or other governmental approval has not been issued for the improvement.

Moreover, California Civil Code § 3081.2 also provides that the landowner must be the owner of record of the real property at the time of recording the lien.

Under California Civil Code § 3081.3, the landowner must have defaulted in a payment obligation pursuant to a written contract with the design professional, who must have given the landowner a specified notice of the default and at least 10 days’ opportunity to cure.

Perfection of the Lien:

California Civil Code § 3081.5 refers to “[a]ny design professionals’ lien perfected pursuant to this chapter” (emphasis added), implying that the lien is both created and perfected when the notice of lien is recorded.

Priority of the Lien:

California Civil Code § 3081.4(a) states that the lien is created, and California Civil Code § 3081.5 provides that it is perfected when the stated prerequisites have been satisfied and the required notice of lien is recorded.

California Civil Code § 3081.9(a) provides that priority over most other liens is measured from the date of recordation:

  1. No lien created by this chapter shall affect or take priority over the interest of record of a purchaser, lessee, or encumbrancer, if the interest of the purchaser, lessee, or encumbrancer in the real property was duly recorded before recordation of the design professionals’ lien.

California Civil Code § 3081.9(b), however, makes the design professional’s lien subordinate to a construction lender’s lien, regardless when the latter was recorded:

  1. No lien created by this chapter shall affect or take priority over an encumbrance of a construction lender which funds the loan to commence the work of improvement for which the design professional furnished services at the request of the landowner.

California Civil Code § 2897 generally provides that, all other things being equal, different liens on the same property have priority according to the time of their creation except in cases of bottomry and respondentia.

The Obligations Secured by the Lien:

Under California Civil Code § 3081.2, the lien secures [a] the amount of the design professional’s fee [b] for any services rendered prior to commencement of the work of improvement or [c] the reasonable value of those services, [d] whichever is less.

The amount of the lien shall be reduced by the amount of any deposit or prior payments, as specified by a written contract entered into by the design professional and by the landowner or his or her agent.

(Emphasis, bracketed letters, and extra paragraphing added.)

The Collateral Subject to the Lien:

Under California Civil Code § 3081.2, the lien applies to “the real property for which the work of improvement is planned to be constructed ….”

The Classes of Secured Party/Debtor Subject to the Lien:

The permissible secured parties are “design professional[s],” defined in California Civil Code § 3081.1 as any [a] certificated architect, registered professional engineer, or licensed land surveyor [b] who furnishes services [c] pursuant to a written contract with a landowner [d] for the design, engineering, or planning of [e] a work of improvement. (Emphasis and bracketed letters added.)

Under California Civil Code § 3081.2, the only debtor subject to the lien is the owner of the land.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured party can protect against a design professional’s lien by searching the county real property records.

Miscellaneous:

Under California Civil Code § 3081.4, the design professional’s lien expires automatically in fairly short order:

(b) The lien created pursuant to subdivision (a) shall automatically expire and be null and void and of no further force or effect on the occurrence of either of the following:

(1) The commencement of the work of improvement for which the design professional furnished services at the request of the landowner.

(2) The expiration of 90 days after recording the notice of lien, unless the design professional files suit to enforce the lien within 90 days of recordation.

s. Labor Claims.

i. Preferred labor claims in assignments for the benefit of creditors under Code of Civil Procedure Section 1204.

[TO BE ADDED IN SUBSEQUENT DRAFT]

ii. Preferred labor claims in bulk sales under Code of Civil Procedure Section 1205.

[TO BE ADDED IN SUBSEQUENT DRAFT]

iii. Preferred labor claims after levy under writ of attachment or execution under Code of Civil Procedure Section 1206.

[TO BE ADDED IN SUBSEQUENT DRAFT]

iv. Employee’s lien on proceeds paid to employer from workmen’s compensation policy under Ins. Code Section 11656.

[TO BE ADDED IN SUBSEQUENT DRAFT]

v. Lien for providing worker’s compensation policy upon finding that employer is illegally uninsured under Lab. Code Section 3720.

[TO BE ADDED IN SUBSEQUENT DRAFT]

vi. Lien for unpaid penalty assessment for failure to provide worker’s compensation insurance under Lab. Code Section 3727.[TO BE ADDED IN SUBSEQUENT DRAFT]

II-C. Liens Arising in Litigation – Hidden Liens Report

1. Attachment of farm products or inventory of a going business by taking possession through a “keeper” under Code of Civil Procedure Section 488.395.

[TO BE ADDED IN SUBSEQUENT DRAFT]

2. Judgment and Execution Orders Arising Under California Code Of Civil Procedure Sections 708.110, 708.120 and 708.205.29

How the Enforcement Liens Arise/Attach:

California’s Enforcement of Judgments Law (the “EJL”), codified at CCP §§ 680.010 through 724.260, contains three provisions that create liens relating to the procedure for conducting an examination of the judgment debtor’s property to aid the court in enforcement of many monetary judgments. A lien cannot be created for a monetary judgment that is payable in installments unless all of the installments have become due and payable or a court has ordered otherwise pursuant to CCP § 697.540(b). Each lien lasts for one year after the order.

The first type of lien attaches to the personal property of a judgment debtor before the conduct of the examination (referred to herein as the “Pre-Examination Lien”). This lien is created automatically under CCP § 708.110 when the judgment creditor serves the judgment debtor with a copy of the court order for examination. The second lien attaches to the personal property of a judgment debtor that is being held by a third party or to the judgment debtor’s interest in a debt owed to it by a third party (referred to herein as the “Pre-Examination Third Party Lien”). This lien is created automatically under CCP § 708.120 if (1) the judgment creditor demonstrates to the court that a third party has possession or control of property in which the judgment debtor has an interest or that a third party is indebted to the judgment debtor in an amount greater than $250 and (2) the judgment creditor serves the order of examination on the judgment debtor and the third party along with fees for the third party’s mileage necessary to attend the examination proceeding. The two pre-examination liens are against all of the debtor’s property. The third lien is created under CCP § 708.205 against those items of the debtor (whether held by the debtor or a third party) that the court determines after examination shall be applied to satisfy the judgment (referred to herein as the “Post-Examination Lien”). These three liens are collectively referred to herein as the “Examination Liens.”

Perfection of the Enforcement Liens:

The EJL does not mention or require perfection of an Examination Lien; the only requirement is that the lien be “created.” See In re Hilde, 120 F.3d 950, 954 (9th Cir. 1997).

Priority of the Enforcement Liens:

The EJL contains a limited number of provisions addressing the priority of execution liens including the Examination Liens but does specifically address the extent to which Examination Liens remain in effect as to property that is subsequently transferred.

The EJL provides that priority of the Pre-Examination Third Party Liens will date from the service of the examination order on the judgment debtor if that order described the property in the hands of the third party. CCP § 708.120(c). If a lien is created on property pursuant to the EJL while an earlier lien under the EJL is still in effect, the priority of the later lien relates back to the date the earlier lien was created. CCP § 697.020(b). This application of the “relation back” doctrine preserves the judgment creditor’s priority as of the time of creation of the first in a series of overlapping liens on the same property.

Other than application of the “relation back” doctrine, the EJL is silent on the subject of priority of Examination Liens. The California Law Revision Commission Report recommending the EJL’s adoption refers to the provisions in Civil Code §§ 2897-2899 concerning the priority of liens. 16 Cal.L.Rev.Comm. Reports 1273 (1982) (comment to CCP § 697.020). Civil Code § 2897 provides that “[other] things being equal, different liens upon the same property have priority according to the time of their creation … .” However, the Civil Code is not the only California statutory authority on the issue of priority. Commercial Code § 9317(a)(2) states that an execution lien, such as an Examination Lien, on personal property takes priority over an unperfected security interest but is subordinated to a security interest that is perfected before the creation of the Examination Lien. In addition, Commercial Code § 9323(b) states that a security interest is subordinate to the rights of a person who becomes a lien creditor to the extent that the security interest secures an advance made more than 45 days after such person becomes a lien creditor. However, there are three circumstances in which the security interest securing the advance would not be subordinated to the Examination Lien (or other execution lien): (1) if the advance was made without knowledge of the Examination Lien, (2) if the advance was made pursuant to a commitment that was entered into without knowledge of the Examination Lien, or (3) the security interest was held by a consignor or a buyer of accounts, chattel paper, payment intangibles or promissory notes. Commercial Code §§ 9323(b) and (c).

The Examination Liens, like other execution liens, take priority over federal tax liens unless proper notice of the federal tax lien was filed before the Examination Lien was created. 26 U.S.C. § 6323(a). The EJL does not address the relative priority of state tax claims over the Enforcement Liens. But the pre-EJL rule was that the priority as between state tax claims and execution liens such as the Examination Liens depended on the particular statute under which the state tax claim was authorized. 6 Cal. Proc. (4th), Provisional Remedies, § 187. It is not clear whether that pre-EJL rule still applies, although there is no reason to believe that it does not.

Under the EJL property that becomes subject to an Examination Lien remains subject to that Examination Lien after a transfer or encumbrance unless that transfer or encumbrance was made to one of the following persons (CCP § 697.740):

(1) A person who acquires an interest in the property for reasonably equivalent value without knowledge of the lien;

(2) A buyer in the ordinary course of business who would take free of a security interest under Commercial Code § 9320;

(3) A lessee or licensee in the ordinary course of business who would take free of a security interest under Commercial Code § 932I;

(4) A holder in due course (as defined in Commercial Code § 3302) of a negotiable instrument within the meaning of Commercial Code § 3104;

(5) A holder to whom a negotiable document of title has been duly negotiated within the meaning of Commercial Code § 7501;

(6) A protected purchaser of a security as defined in Commercial Code § 8303 or a person entitled to the benefits of Commercial Code §§ 8502 or 8510;

(7) A purchaser of chattel paper or an instrument who gives new value and takes possession of the chattel paper or instrument in the ordinary course of business;

(8) A holder of a purchase money security interest under Commercial Code § 9103;

(9) A collecting bank holding a security interest in items being collected, accompanying documents and proceeds pursuant to Commercial Code § 4210;

(10) A person who acquires any right or interest in letters of credit, advices of credit or money; or

(11) A person who acquires any right or interest in property subject to a certificate of title statute of another jurisdiction under the law
of which indication of a security interest on the certificate of title is required as a condition of perfection of the security interest.

The Obligations Secured by the Lien:

The Examination Liens secure the amount of the underlying monetary judgment. See CCP § 708.205 (referring to the amount secured by a Post-Examination Lien). The Pre-Examination Lien and Pre-Examination Third Party Lien will expire one year from the date of the court’s order of examination (not the date of service) unless extended or sooner terminated by the court. CCP §§ 708.110(d), 708.120(c).

The Collateral Subject to the Lien:

Any personal property could be subject to an Examination Lien unless such personal property falls within an exemption. CCP §§ 704.010 through 704.210 exempt various types of property of natural persons from the Examination Liens to allow the judgment debtor to protect himself and his family and the court also may grant an exemption based upon need. CCP § 703.115. The enumerated exemptions include the first $2300 in value of motor vehicles, household furnishings at the judgment debtor’s principal residence, the first $6,075 in value of jewelry, heirlooms and works of art and life, health, disability, unemployment, workers’ compensation and insurance benefits. See CCP §§ 704.010-704.210. The dollar thresholds in the various enumerated exemptions are subject to triennial adjustments based upon changes in the California Consumer Price Index for All Urban Consumers. CCP § 703.150(b), (c). The enumerated exemptions are not intended to be exclusive. See 703.030(a) (referring to exemptions under other statutes); See also 703.050 (regarding the effective date of exemption statutes that exemptions may be claimed under). Exemptions may be waived by the judgment debtor at the time the exemption can be claimed but contractual or other prior waivers of the exemptions are invalid. CCP §§ 703.030, 703.040.

An assignor for the benefit of creditors is entitled to the exemptions that could be used against the Examination Liens. CCP §1801.

Property subject to a public trust is not subject to execution. El Camino Irr. Dist. v. El Camino Land Corp., (1938) 12 C.2d 378, 382.

The Classes of Secured Party/Debtor Subject to the Lien:

Any personal property could be subject to an Examination Lien unless such personal property falls within an exemption. CCP §§ 704.010 through 704.210 exempt various types of property of natural persons from the Examination Liens to allow the judgment debtor to protect himself and his family and the court also may grant an exemption based upon need. CCP § 703.115. The enumerated exemptions include the first $2300 in value of motor vehicles, household furnishings at the judgment debtor’s principal residence, the first $6,075 in value of jewelry, heirlooms and works of art and life, health, disability, unemployment, workers’ compensation and insurance benefits. See CCP §§ 704.010-704.210. The dollar thresholds in the various enumerated exemptions are subject to triennial adjustments based upon changes in the California Consumer Price Index for All Urban Consumers. CCP § 703.150(b), (c). The enumerated exemptions are not intended to be exclusive. See 703.030(a) (referring to exemptions under other statutes); See also 703.050 (regarding the effective date of exemption statutes that exemptions may be claimed under). Exemptions may be waived by the judgment debtor at the time the exemption can be claimed but contractual or other prior waivers of the exemptions are invalid. CCP §§ 703.030, 703.040.

An assignor for the benefit of creditors is entitled to the exemptions that could be used against the Examination Liens. CCP §1801.

Property subject to a public trust is not subject to execution. El Camino Irr. Dist. v. El Camino Land Corp., (1938) 12 C.2d 378, 382.

The Classes of Secured Party/Debtor Subject to the Lien:

Any debtor could become subject to the Examination Liens including state or municipal entities. In addition, as discussed above natural persons and assignors for the benefit of creditors are entitled to exempt various types of property from the Examination Lien.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured party can protect itself to some extent by searching for judgments prior to making any new loans or additional advances. If a judgment is discovered, the secured party can require the borrower to make a representation that neither it nor any third party in possession of its property has not been served with any orders to appear at a post-judgment examination. A covenant requiring the borrower to report any judgments and the service of post-judgment examination orders may also provide some protection.

3. Liens arising in creditor’s suit under Code of Civil Procedure Section 708.250.30

How the Lien Arises/Attaches:

The statutory provisions in California for the enforcement of judgments not only authorize a levy by a judgment creditor against a third person indebted to or in possession of property of the judgment debtor, but also authorize the judgment creditor to bring suit against those third persons, if necessary or appropriate. If a judgment creditor elects to file a creditor suit against a third party to recover either property of the judgment debtor held by this third party or a debt owed to the judgment debtor by the third party, Section 708.250 of the California Code of Civil Procedure provides that an equitable lien is created on the property or debt which is the subject of the action upon the service of a summons on the third party. Wardley Development, Inc. v. The Superior Court of Los Angeles County, 213 Cal. App. 3d 391, 395 (App. Ct. CA 1989).

Perfection of the Lien:

The service of the summons creates the statutory lien and California law does not provide for any additional step to perfect this lien.

Priority of Lien:

Although the service of the summons in a creditor suit creates a statutory lien on the property which is the subject of that action and no further action is required by the judgment creditor to establish or perfect that lien, there is no indication in the statute that would give that lien any priority over an existing perfected security interest in that property.

A creditor who acquires a lien under Section 708.250 “acquires only an equitable lien on such assets and a priority over general creditors” who have not served a summons of the type covered by Section 708.250. Wardley, 398. The equitable lien “is superior to general creditors or assignees of the property subject to the lien … [but] the lien does not give the judgment creditor an immediate right to compel transfer of the subject property to him.” Id. Wardley states that it would be unjust to allow a Section 708.250 lien “to set lien priority over other creditors who must establish the validity or probable validity of their claims before they are entitled to establish lien priority of record,” suggesting that such liens may not have priority over subsequent secured liens. Id.

Obligation Secured by the Lien:

The obligations secured by the lien created pursuant to Section 708.250 are the amount of debt owed by such third party to the judgment debtor and/or the amount of property of the judgment debtor held by such third party.

The lien prevents the third party from distributing assets in derogation of the lien, as such action makes the third party personally liable to the lienholder for the amount of such distribution, up to the amount of the lienholder’s claim. See Wardley, 398.

The Collateral Subject to the Lien:

The lien created pursuant
to Section 708.250 covers the interest of the judgment debtor in the property or on the debt owed to the judgment debtor that is the subject of the creditor action.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

From the standpoint of a secured creditor of the judgment debtor with a perfected security interest in the assets of the judgment debtor, this statutory lien does not prime the existing perfected security interest. Even if the prior security interest is unperfected, Section 2897 of the Civil Code generally provides that, all other things being equal, different liens on the same property have priority according to the time of their creation and therefore the prior secured creditor should have priority over the judgment creditor’s lien.

Although a Section 708.250 lien creditor might claim priority over subsequent secured creditors, the language of Wardley renders such a claim of priority suspect, due to the extreme weakness of the Section 708.250 lien.

If a secured creditor of the judgment debtor learns of any such creditor action, or a levy by the judgment creditor on any asset of the judgment debtor, the secured creditor may want to consider filing a third party claim under California law (Code of Civil Procedure §§ 720.010 et seq.) in order to establish its priority in the asset.

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From the standpoint of a secured creditor of the third party defendant in this creditor action, that is the entity that holds property in which the judgment debtor has an interest, or owes a debt to the judgment debtor, there should not be any adverse impact since the basis of the creditor action is that this is property of the judgment debtor and not the person holding the asset. In some instances property may be owned not only by the judgment debtor but also by the third person holding the asset and in that situation, a secured creditor of the third party may want to file a third party claim to establish its lien position with respect to the interest of its debtor.

4. Liens arising under charging order under Code of Civil Procedure Section 708.320 and Corporations Code Sections 16504 and 17302.31

How the Lien Arises/Attaches:

General Partnership. Under the Uniform Partnership Act of 1994, a partner is not a co-owner of partnership property and has no transferable interest in the property. Corporations Code § 16501. A partner’s only transferable interest is that partner’s personal property interest in a share of the partnership’s profits and losses and the right to receive distributions. Corporations Code § 16502. In order to reach a debtor’s partnership interest, the judgment creditor must obtain a court order charging that interest with the amount of the judgment. Code of Civil Procedure §§ 699.720(a)(2); 708.310. The charging order replaces the levy of execution as a remedy for reaching a partnership interest.

Corporations Code § 16504 provides the exclusive remedy by which a judgment creditor of a partner or partner’s transferee may satisfy a judgment out of the judgment debtor’s transferable interest in the partnership. Corporations Code § 16504(e). Corporations Code § 16504(a) provides:

On application by a judgment creditor of a partner or of a partner’s transferee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or that the circumstances of the case may require.

A charging order constitutes a lien on the judgment debtor’s transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee. Corporations Code § 16504(b). The partner is not deprived of its rights under exemption laws with respect to the partner’s interest in the partnership. Corporations Code § 16504(d).

Service of a notice of motion for a charging order on the judgment debtor and all partners or the partnership creates a lien on the judgment debtor’s partnership interest. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court’s charging order until the judgment becomes unenforceable. The lien also continues notwithstanding the transfer or encumbrance of the partnership interest, unless the transfer or encumbrance is made to a person listed in Code of Civil Procedure § 697.740. But, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Limited Partnership. Under the California Uniform Limited Partnership Act of 2008, a limited partnership is an entity distinct from its partners. Corporations Code § 15901.04(a). The only interest of a partner which is transferable is the partner’s right to receive distributions. Corporations Code § 15907.01. In order to reach a debtor’s limited partnership interest, the judgment creditor must obtain a court order charging that interest with the amount of the judgment. Code of Civil Procedure §§ 699.720(a)(2); 708.310. The charging order replaces the levy of execution as a remedy for reaching a limited partnership interest.

Corporations Code § 15903.03 provides the exclusive remedy by which a judgment creditor of a limited partner or limited partner’s transferee may satisfy a judgment out of the judgment debtor’s transferable interest in the partnership.

Under the California Uniform Limited Partnership Act of 2008, a charging order on a limited partnership interest only gives the judgment creditor the rights of an assignee of the interest. Corporations Code § 15907.03(a). The limited partnership is not dissolved; nor is the judgment creditor entitled to become a limited partner or exercise any rights of a limited partner. No creditor of a partner has any right to obtain possession or otherwise exercise legal or equitable remedies with respect to the property of a limited partnership. Corporations Code § 15907.03(f).

A charging order constitutes a lien on the judgment debtor’s limited partnership interest in the partnership. Code of Civil Procedure § 708.320.

Service of a notice of motion for a charging order on the judgment debtor and all partners or the partnership creates a lien on the judgment debtor’s limited partnership interest. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court’s charging order until the judgment becomes unenforceable. The lien also continues notwithstanding the transfer or encumbrance of the partnership interest, unless the transfer or encumbrance is made to a person listed in Code of Civil Procedure § 697.740. But, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Limited Liability Company Interest. Under the Beverly-Killea Limited Liability Company Act, a membership interest and an economic interest in a limited liability company constitute personal property of the member or assignee. Corporations Code § 17300. A member or assignee has no interest in specific limited liability company property. Corporations Code § 17300. In order to reach a debtor’s limited liability interest, the judgment creditor must obtain a court order charging that interest with the amount of the judgment. Code of Civil Procedure §§ 699.720(a)(2); 708.310. The charging order replaces the levy of execution as a remedy for reaching a membership interest.

Corporations Code § 17302 provides the exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment out of the judgment debtor’s transferable interest in the limited liability company. Corporations Code § 17302(e). Corporations Code § 17302(a) provides:

On application by a judgment creditor of a member or of a member’s assignee, a court having jurisdiction may charge the assignable membership interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect to the limited liability company and may make all other orders, directions, accounts, and inquiries that the judgment debtor might have made or that the circumstances of the case may require.

A charging order constitutes a lien on the judgment debtor’s assignable interest in the limited liability company, and the court may order a foreclosure of the interest subject to the charging order at any time. Corporations Code § 17302(b). The purchaser at the foreclosure sale has the rights of an assignee. Corporations Code § 17302(b). The member is not deprived of its rights under exemption laws with respect to the member’s interest in the limited liability company. Corporations Code § 17302(d).

Service of a notice of motion for a charging order on the judgment debtor and all of the members of the limited liability company creates a lien on the judgment debtor’s membership interest. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court’s charging order until the judgment becomes unenforceable. The lien also continues notwithstanding the transfer or encumbrance of the membership interest, unless the transfer or encumbrance is made to a person listed in Code of Civil Procedure § 697.740. But, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Perfection of the Lien:

A lien on a judgment debtor’s interest in a partnership or limited liability company is created by service of a notice of motion for a charging order on the judgment debtor and either (a) all partners or the partnership; or (b) all members or the limited liability company. Code of Civil Procedure § 708.320(a). The lien continues under the terms of the court’s charging order until the judgment becomes unenforceable; however, if the court refuses to issue a charging order (or if the judgment is stayed pending appeal), the lien is extinguished. Code of Civil Procedure §§ 697.030, 697.040, 708.320(b).

Priority of the Lien:

A lien arising under Code of Civil Procedure § 708.320 is subject to a prior perfected security interest in a partnership or limited liability company interest. The Legislative Committee Comments to Code of Civil Procedure § 697.020 state that Section 697.020 provides “the general rule regarding the relation back of liens to preserve the judgment creditor’s priority as of the time of the creation of the first in a series of overlapping liens on the same property.” Thus, “Subdivision (c) of Section 697.020 makes clear that the relation back doctrine does not affect the priority or rights of a third person established while the earlier lien was in effect.”

The Obligations Secured by the Lien:

The lien created under Code of Civil Procedure § 708.320 secures the amount necessary to satisfy the money judgment. Code of Civil Procedure § 697.010.

The Collateral Subject to the Lien:

The lien created under Code of Civil Procedure § 708.320 is applicable to the judgment debtor’s interest in a partnership or limited liability company, i.e. a share of the partnership’s profits and losses and the right to receive distributions, and a share of the distributions due or to become due to the judgment debtor in respect to the limited liability company.

The Classes of Secured Party/Debtor Subject to the Lien:

Secured parties who take as collateral a debtor’s interest in either a partnership or a limited liability company are subject to the hidden lien under Code of Civil Procedure § 708.320.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Secured lenders can protect themselves against the hidden lien created under Code of Civil Procedure § 708.320 by (a) performing a judgment lien search prior to funding its loan to confirm that there are no other liens on the partnership or limited liability company interest; and (b) require the debtor to represent and warrant that the debtor is not a party to any litigation, nor has a judgment been entered against the debtor that has not been satisfied in full.

Miscellaneous:

The interest of a partner in a partnership or member in a limited liability company is not subject to execution if the partnership or the limited liability company is not a judgment debtor. Code of Civil Procedure § 699.720(a)(2). The exclusive remedy by which a judgment creditor of a partner or member may satisfy a judgment out of the judgment debtor’s transferable interest in the partnership or limited liability company is a charging order.

5. Liens for money owed to judgment debtor by public entity under Civil Procedure Section 708.780.32

Statutory Framework:

Code of Civil Procedure § 708.780, subdivision (a) provides as follows:

Filing of the abstract or certified copy of the judgment and the affidavit pursuant to this article creates a lien on the money owing and unpaid to the judgment debtor by the public entity in an amount equal to that which may properly be applied to the satisfaction of the money judgment under this article.

How the Lien Arises/Attaches:

If a public entity owes money to a judgment debtor, the obligation of the public entity may be applied to the satisfaction of the money judgment against the judgment debtor only in the manner provided by CCP Article 8 (CCP §§ 708.710 through 708.795). CCP § 708.720(a). “Public entity” means the State of California, any county, city, district, public authority, public agency, and any other political subdivision in the State of California. CCP § 708.710. CCP Article 8 does not apply to the garnishment of wages of a public officer or employee or if the obligation of the public entity to pay money to the judgment debtor is the subject of a pending action or special proceeding. CCP § 708.720. Except as to sums due and unpaid under a judgment of support, CCP Article 8 does not authorize a filing against an overpayment of tax, penalty or interest, or interest allowable with respect to an overpayment, under the Revenue and Taxation Code or the Unemployment Insurance Code. CCP § 708.795.

If money is owing and unpaid to the judgment debtor by a public entity, the judgment creditor may file, in the manner described in the next paragraph, an abstract of the money judgment or a certified copy of the money judgment, together with an affidavit that states that the judgment creditor desires the relief provided by CCP Article 8 and states the exact amount then required to satisfy the judgment. The judgment creditor may state in the affidavit any fact tending to establish the identity of the judgment creditor. CCP § 708.730(a). Promptly after filing the abstract or certified copy of the judgment and the affidavit with the public entity, the judgment creditor shall serve notice of the filing on the judgment debtor. Service shall be made personally or by mail. CCP § 708.730(b).

If money is owing and unpaid to the judgment debtor by a state agency (defined in CCP § 708.710(d)), the judgment creditor shall file the abstract or certified co
py of the judgment and the affidavit with the state agency owing the money to the judgment debtor prior to the time the state agency presents the claim of the judgment debtor to the Controller. CCP § 708.740(a). If money is owing and unpaid to the judgment debtor by a public entity other than a state agency, the judgment creditor shall file the abstract or certified copy of the judgment and the affidavit with the auditor of the public entity or, if there is no auditor, with the official whose duty corresponds to that of auditor. CCP § 708.750. Upon filing the abstract or certified copy of the judgment and the affidavit, the judgment creditor shall pay a fee of $6 to the public entity with which it is filed. CCP § 708.785. Additional special procedures apply if the lien of the judgment creditor is created against a lottery prize to be paid in annual installments (CCP § 708.755) or if the judgment debtor is a contractor upon a public work (CCP § 708.760).

The Controller (in the case of a state agency) or auditor (in the case of other public entities) shall deposit with the court the amount due the judgment debtor (after deducting an amount sufficient to reimburse the public entity for any amounts advanced to the judgment debtor or owed by the judgment debtor to the public entity) required to satisfy the money judgment as shown by the affidavit in full or to the greatest extent, and pay the balance thereof, if any, to the judgment debtor. CCP § 708.740(c); CCP § 708.750. Promptly after deposit with the court by the public entity, the court clerk shall cause a notice of deposit to be served on the judgment debtor. Within 10 days after service of the notice of deposit, the judgment debtor may file with the court a claim of exemption. CCP § 708.770.

Different procedures apply where the judgment is for support. See, e.g., CCP § 708.730(c).

Perfection of the Lien:

CCP § 708.780 provides that filing the judgment and affidavit pursuant to CCP Article 8 “creates” a lien. The statute does not provide for any additional steps to be taken to perfect the lien.

Priority of the Lien:

Priority of the lien may be governed by Commercial Code § 9317, which provides generally that a security interest is subordinate to the rights of a person that becomes a lien creditor before the time the security interest is perfected. Under Commercial Code § 9102(a)(52), “lien creditor” includes a creditor that has acquired a lien on the property involved by attachment, levy or the like. It is uncertain whether a judgment creditor who has acquired a lien under CCP § 708.780 is a “lien creditor” because the judgment creditor acquires the lien by filing with the public entity rather than through a judicial process. If the judgment creditor is not a “lien creditor,” then it may achieve priority under the common law’s “time of creation” principle codified in Civil Code § 2897 (under this principle, where there are conflicting liens that are in all other respects equal, the priority given to a lien is based on when it was created).

Obligations Secured by the Lien:

The lien created under CCP § 708.780 secures the amount required to satisfy the money judgment in full, as shown by the affidavit filed with the public entity.

The Collateral Subject to the Lien:

The lien created under CCP § 708.780 attaches to the money owing and unpaid to the judgment debtor by the public entity, subject to the limitations set forth in CCP Article 8. For example, the lien does not attach to tax refunds, unless the judgment is for support.

The Classes of Secured Party/Debtor Subject to the Lien:

All classes of secured parties and all classes of debtors are subject to the lien created under CCP § 708.780.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured creditor can obtain priority over the lien created under CCP § 708.780 and protect itself against this hidden lien by (a) properly perfecting its security interest in accordance with Revised Article 9 of the Commercial Code, (b) performing a search of the applicable Secretary of State’s Commercial Code filing records and each county where the borrower owns or leases any real property or fixtures prior to funding its loan to confirm that there are no judgments of record against the borrower, (c) requiring the borrower to represent and warrant that there are no outstanding judgments against it, and (d) requiring the borrower to represent and warrant that no public entity owes any money to the borrower, or if a public entity owes money to the borrower, requiring the borrower to provide a list of each such public entity including contact information. The secured creditor should then contact each such public entity to confirm that no judgment creditor of the borrower has made a filing pursuant to CCP Article 8.

Miscellaneous:

Unless there is a definite sum owing and unpaid by the public entity to the judgment debtor, there can be nothing upon which the lien can attach. However, provided that the existence of liability and the amount thereof is fixed and determined beyond the possibility of further dispute, such sum does not have to be fixed and established by a final judgment against the public entity. Department of Water and Power of City of Los Angeles v. Inyo Chemical Co., 16 Cal.2d 744, 108 P.2d 410 (1940).

6. Liens in pending actions or proceedings under Code of Civil Procedure Section 491.410.

[TO BE ADDED IN SUBSEQUENT DRAFT]

7. Execution liens under Code of Civil Procedure Section 697.710.

[TO BE ADDED IN SUBSEQUENT DRAFT]

II-D. Agricultural Liens – Hidden Liens Report

1. Trust under Perishable Agricultural Commodities Act, 7 U.S.C. Sections 499 et seq.33

Statutory Framework:

Section 499e(c)(2) of the Perishable Agricultural Commodities Act of 1930 (“PACA”) provides as follows:

Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.

How the Lien Arises/Attaches:

PACA permits a non-segregated floating trust that permits commingling of the trust assets. See PACA § 499e(c)(2); Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995) (stating that Section 499e(c)(2) “imposes a ‘non-segregated floating trust’ on the commodities and their derivatives, and permits the commingling of trust assets”). For the trust to result:

  1. the buyer must be a “commission merchant,” “dealer” or “broker” as defined by PACA (a “PACA Buyer”);
  2. the buyer must have received perishable agricultural commodities (“PACA Commodities”);
  3. the PACA Commodities must have been shipped through interstate or foreign commerce;
  4. the supplier, seller or agent of the PACA Commodities (a “PACA Seller”) must be unpaid; and
  5. the PACA Seller must have preserved its trust rights by giving written notice to the PACA Buyer within the specified time period.

Perfection of the Lien:

To protect its trust rights, a PACA Seller need only provide notice of the trust to the PACA Buyer within thirty days of a payment default. 7 U.S.C. § 499e(c)(3) (2003) and 7 C.F.R. § 46.46(f) (2003). The PACA Seller may provide the notice one of two ways: (1) by a separate mailing of the trust notice to the PACA Buyer, or (2) by including a specific notice of the trust rights on its invoice. There is no federal database or registry to search for PACA notices.

Priority of the Lien:

The trust created by PACA takes priority over the interests of all other creditors, including secured creditors.

Obligations Secured by the Lien:

The PACA Trust is for the benefit of any PACA Seller.

The Collateral Subject to the Lien:

The trust assets include the PACA Commodities as well as products derived from the PACA Commodities and the proceeds from the sale of the PACA Commodities. 7 U.S.C. § 499e(c)(2) (2003). For example, proceeds from the sales of meals prepared from PACA Commodities are subject to the PACA Trust because the meals are “products derived from perishable agricultural commodities” and the proceeds of such meals are “receivables or proceeds from the sale” of such products. See Red’s Market v. Cape Canaveral Cruise Line, Inc., 181 F. Supp. 2d 1339, 1342 (M.D. Fla. 2002) (finding proceeds of meals prepared by cruise line to be subject to PACA Trust); JC Produce v. Paragon Steakhouse Restaurants, Inc., 70 F. Supp. 2d 1119 (E. D. Cal. 1999) (extending PACA Trust to food purchased by restaurants, made into meals that were sold and the proceeds thereof).

The Classes of Secured Party/Debtor Subject to the Lien:

  1. Secured parties who finance restaurants, food manufacturers or any other business that purchases fruits, vegetables and other PACA Commodities are subject to the PACA Trust.
  2. Debtors who purchase fruits, vegetables and other PACA Commodities are subject to the PACA Trust.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

To mitigate the effects of PACA, a lender may consider: (1) implementing a reserve or requiring a letter of credit for unpaid PACA Commodities based upon the historical amounts owed to PACA Sellers; (2) requiring daily or monthly reporting of amounts owed to PACA Sellers and the identity of the PACA Sellers; (3) including covenants in the loan agreement for the delivery of any PACA notices and an updated list of the borrower’s suppliers; and (4) monitoring the borrower’s accounts payable to PACA Sellers on an ongoing basis by inquiring of the borrower’s suppliers. Conversely, any lender contemplating a loan to a PACA Seller should ensure that the PACA Seller is preserving its PACA Trust benefits by timely sending notice of its trust rights or noting those rights on its invoices in the prescribed form.

2. Trust under Packers and Stockyards Act, 7 U.S.C. Sections 181 et seq.34

How the Lien Arises/Attaches:

Under the Packers and Stockyards Act, 7 U.S.C. §§ 181 et seq., all livestock purchased by a packer and poultry purchased by a live poultry dealer in cash sales, and all inventories of, or receivables or proceeds from meat food products or livestock products derived therefrom shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock and/or poultry until full payment has been received by such unpaid sellers.35 

If a packer or live poultry dealer fails to pay a cash livestock or poultry seller on time, the trust will arise. Unless otherwise agreed, a livestock purchaser must pay the seller by the close of the next business day following the sale an transfer of possession. (7 U.S.C. § 228b(a)). In order for the trust to be preserved, the unpaid cash seller must deliver a written notice to a buyer within thirty days after the final due date for the payment or within fifteen business days after receipt of a dishonored payment instrument. The unpaid cash seller must also file the notice with the Secretary of Agriculture. (7 U.S.C. § 196(b)).

The Packers and Stockyards Act applies to (i) “packers” which means “any person engaged in the business (a) of buying livestock in commerce for purposes of slaughter, or (b) of manufacturing or preparing meats or meat food products for sale or shipment in commerce, or (c) of marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce” (7 U.S.C. § 191), and (ii) “live poultry dealers” which means “any person engaged in the business of obtaining live poultry by purchase or under a poultry growing arrangement for the purpose of either slaughtering it or selling it for slaughter by another, if poultry is obtained by such person in commerce, or if poultry obtained by such person is sold or shipped in commerce, or if poultry products from poultry obtained by such person are sold or shipped in commerce.” (7 U.S.C. § 182(10)). It also applies to a “market agency” pursuant to 9 C.F.R. § 202.42. A “market agency” is defined as any person engaged in the business of (1) buying or selling in commerce livestock on a commission basis, or (2) furnishing stockyard services. (7 U.S.C. § 201(c)).

Perfection:

Since this is a trust structure, the concept of perfection is not directly applicable. How
ever, as discussed above an unpaid cash seller must deliver written notice to the packer or poultry dealer and to the Secretary of Agriculture in order to preserve the trust.

Priority of the Enforcement Liens:

The trust in favor of unpaid cash sellers is intended to have priority over all secured creditors including creditors with perfected liens under the Uniform Commercial Code and a bankruptcy trustee. In re Frosty Morn Meats, Inc., 7 B.R. 988 (M.D. Tenn. 1980).

The Obligations Secured by the Lien:

The trust secures amounts due to any unpaid cash seller of livestock and poultry by the debtor.

The Collateral Subject to the Lien:

All livestock purchased by a packer and poultry purchased by a poultry dealer in cash sales, and all inventories of, or receivables or proceeds from meat food products or livestock products derived therefrom shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock are subject to the lien until full payment has been received by such unpaid sellers. Note that the trust covers even livestock and poultry that originate from the cash sale and livestock and poultry that do not originate from the cash sale if such assets are commingled with other property unless the packer can identify and segregate any non-trust property.

The Classes of Secured Party/Debtor Subject to the Lien:

A debtor’s livestock and/or poultry assets may be subject to this trust if (i) the debtor is a “packer” as defined in the Packers and Stockyards Act, and (ii) the debtor’s average annual livestock purchases exceed $500,000 or the debtor’s average annual poultry purchases exceed $100,000. The trust will benefit any unpaid cash livestock or poultry seller.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured party will not be able to obtain priority over the unpaid cash seller and circumvent the effects of the Packers and Stockyards Act. Therefore, to mitigate the effects of this lien, a lender should consider (1) requiring other collateral that is not livestock or poultry, but that strategy will only be effective if the other collateral is not purchased with funds subject to the trust, (2) requiring the packer or poultry dealer to pay for the livestock or poultry timely and perhaps even into an escrow that will not be released until the packer or poultry dealer receives sufficient comfort that the seller’s downstream payment obligations have been satisfied, (3) performing audits on the payment arrangements of the sellers to the packers or poultry dealers and requiring the packer or poultry dealer to maintain a reserve for the value of all collateral (livestock, poultry receivables or otherwise) that could become subject to the lien, (4) including appropriate reporting requirements in the loan documentation including prompt notice of the receipt by the packer or poultry dealer of any notices under the applicable statute, and (5) requiring one or more personal guaranties from the principals of the packer.

3. Agricultural laborer’s lien under Civil Code Section 3061.5. 36

How the Lien Attaches:

California Civil Code § 3061.5, subdivision (a) provides that:

Any person who as an employee, shall, by his or her own labor, do or perform any work harvesting or transporting harvested crops or farm products as defined in Section 55403 of the Food and Agricultural Code which are owned and grown or produced by a limited partnership as defined in Section 15501 of the Corporations Code, has a lien upon any and all of the severed crops or severed farm products or proceeds from their sale for the value of the labor done up to a maximum of earnings for two weeks. The liens attach whether the work was done at the instance of the owner who is the grower or producer of severed crops or severed farm products or of any other person acting by or under the owner’s authority, directly or indirectly, as contractor or otherwise; and every contractor, subcontractor, or other person having charge of the harvesting or transporting of the severed crops or severed farm products shall be held to be the agent of the owner for the purposes of this section.

California Civil Code § 3061.5, subdivision (b) provides that these liens attach from the date of the commencement of the work or labor. The statute does not require the potential lien claimant to take any action other than perform labor in the work of harvesting or transporting harvested crops or farm products. There is a significant limitation on the applicability of the lien since the statute provides that it only applies to crops or farm products owned and grown or produced by a limited partnership.

Perfection of the Lien:

California Civil Code § 3061.5 does not provide any steps for perfection of the lien but Section 3061.6 of the California Civil Code, subdivision (a) provides that:

The lien created by Section 3061.5 shall continue in force for a period of 45 days from the time the person claiming such lien shall have ceased to do or perform the work for which such lien is claimed, and such lien shall cease at the expiration of the 45 days unless the claimant, his or her assignee or successor in interest, files a claim with the Labor Commissioner or brings suit to foreclose the lien in which case the lien continues in force until the claim filed with the Labor Commissioner or the lien foreclosure suit is finally determined and closed. If a claim is filed with the Labor Commissioner, the Labor Commissioner shall act upon and finally determine such claim within 180 days after filing. In case such proceedings are not prosecuted to trial within two years after the commencement thereof, the court may in its discretion dismiss the same for want of prosecution.

California Civil Code § 3061.6, subdivision (b) provides that:

Upon filing a claim with the Labor Commissioner, the Labor Commissioner, if the owner who is the grower or producer has failed to satisfy the conditions of subdivision (d) of Section 3061.5, shall determine whether or not such owner of the severed crops, severed farm products, or their proceeds is capable financially of satisfying such claim. For purposes of this determination, it shall be proper for the Labor Commissioner after investigation to take into account the potential liability faced by such owner of such severed crops, severed farm products, or their proceeds. If the Labor Commissioner determines that a lien is necessary to protect the interest of claimants, the Labor Commissioner shall file such lien on the crop, the severed farm product, or their proceeds and notify, in writing, the owner and notify, in writing, all persons who have filed financing statements on the crop, the farm product, or their proceeds pursuant to the provisions of the Commercial Code.

Priority of the Lien:

California Civil Code § 3061.5, subdivision (b) provides that these liens “are preferred liens, prior in dignity to all other liens, claims, or encumbrances.”

Obligations Secured by the Lien:

California Civil Code § 3061.5, subdivision (a) provides that the lien created thereunder secures the obligations of a limited partnership to pay the value of labor done by an employee doing his or her own labor performing work harvesting or transporting harvested crops or farm products up to a maximum of earnings for two weeks.

California Civil Code § 3061.5, subdivision (b) provides that:

Except as provided in California Civil Code § 3061.5 subdivisions (a) and (c) they shall not be limited as to amount by any contract price agreed upon between the owner who is the grower or producer of the severed crop
s or severed farm products and any contractor, but the several liens shall not in any case exceed in amount the reasonable value of the labor done, nor the price agreed upon for the labor between the claimant and his or her employer. In no event, where the claimant was employed by a contractor, or subcontractor, shall the lien extend to any labor not contemplated by, covered by, or reasonably necessary to the execution of, the original contract between the contractor and the owner who is the grower or producer of severed crops or severed farm products and of which contract, or modification thereof, the claimant had actual notice before the performance of the labor.

California Civil Code § 3061.5, subdivision (c) provides that:

The maximum liability of severed crops, severed farm products or the proceeds from their sale subject to liens under this section is limited to the lesser of actual proved claims or 25 percent of the fair market value of the severed crops, severed farm products, or 25 percent of the proceeds after their sale.

Collateral Subject to the Lien:

The lien created under California Civil Code § 3061.5 is applicable to “any and all of the severed crops or severed farm products or proceeds from their sale.” California Civil Code § 3061.5, subdivision (c), however, limits the collateral to the lesser of actual proved claims or 25 percent of the fair market value of the severed crops, severed farm products or proceeds of sale.

Classes of Secured Parties/Debtor Subject to the Lien:

Secured parties who take crops or farm products as defined in Section 55403 of the Food and Agricultural Code as collateral from a limited partnership are subject to the hidden lien arising under California Civil Code § 3061.5 which is a preferred lien and has priority over all other liens, claims or encumbrances.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

California Civil Code § 3061.5, subdivision (b) expressly provides that the liens created under California Civil Code § 3061.5, subdivision (a) are created when a limited partnership hires laborers and the laborers perform harvesting or crops or transportation services with respect to harvested crops. These liens are preferred liens with priority over all other liens, claims and encumbrances and therefore the secured party does not have any way to protect its priority in the crops or farm products or proceeds thereof. Secured parties who make loans to limited partnerships in the business of harvesting or transporting harvested crops should require the borrowers to promptly pay all laborers and the secured parties should take steps to monitor the borrower’s compliance with these covenants. Although the liens will arise automatically when the laborers perform their services, once the laborers are paid for their services, the liens for those services will be extinguished.

Furthermore, California Civil Code § 3061.5, subdivision (d) provides that:

No person has a lien if the owner who is the grower or producer of the severed crops, severed farm products, or their proceeds, who otherwise would be subject to a lien pursuant to subdivision (a), either gives directly, or requires a person or entity hired or used to furnish labor in connection with harvesting or transporting the severed crops, to give to the Labor Commissioner prior to the harvest and for 45 days after its completion, a bond executed by an admitted surety insurer in an amount and form acceptable to the Labor Commissioner, which is conditioned upon the payment of all wages found to be due and unpaid in connection with such operations under any provision of this code.

Therefore, secured parties who make loans to limited partnerships in the business of harvesting or transporting harvested crops should also require the borrowers to give the Labor Commissioner prior to the harvest and for 45 days after its completion, a bond executed by an admitted surety insurer in an amount and form acceptable to the Labor Commissioner. This bond will serve as additional assurance that the limited partnership will pay all wages to its laborers.

Civil Code § 3061.5, subdivision (e) provides that a buyer in the ordinary course of business, as defined in subdivision 9 of Section 1201 of the Commercial Code, takes free of the agricultural laborer’s lien created by this section, notwithstanding the fact that the lien is perfected and the buyer knows of its existence.

4. Lien for pest abatement under Food & Agric. Code Section 5431.

[TO BE ADDED IN SUBSEQUENT DRAFT]

5. Lien on land for removal of plants and crops which are nuisances under Food & Agric. Code Section 5632.

[TO BE ADDED IN SUBSEQUENT DRAFT]

6. Lien for camelthorn abatement under Food & Agric. Code Section 7305.

[TO BE ADDED IN SUBSEQUENT DRAFT]

7. Lien for expenses of treating cattle or sheep under Food & Agric. Code Section 9331.

[TO BE ADDED IN SUBSEQUENT DRAFT]

8. Lien for expenses for confinement of cattle under Food & Agric. Code Section 10152.

[TO BE ADDED IN SUBSEQUENT DRAFT]

9. Lien for expenses of vaccinating calves under Food & Agric. Code Section 10355.

[TO BE ADDED IN SUBSEQUENT DRAFT]

10. Lien for expenses of testing cattle in brucellosis control area under Food & Agric. Code Section 10385.

[TO BE ADDED IN SUBSEQUENT DRAFT]

11. Lien for expenses incurred in caring for property under Food & Agric. Code Section 16526.

[TO BE ADDED IN SUBSEQUENT DRAFT]

12. Lien of railroad for expenses associated with transportation of animals, Food & Agric. Code Section 16907.

[TO BE ADDED IN SUBSEQUENT DRAFT]

13. Lien for care of stray animals under Food & Agric. Code Section 17041.

[TO BE ADDED IN SUBSEQUENT DRAFT]

14. Agricultural producer’s lien under Food & Agric. Code Section 5563.

[TO BE ADDED IN SUBSEQUENT DRAFT]

15. Livestock seller’s lien under Food & Agric. Code Section 55702.

[TO BE ADDED IN SUBSEQUENT DRAFT]

16. Dairy cattle supply lien under Food & Agric. Code Section 57402.

[TO BE ADDED IN SUBSEQUENT DRAFT]

17. Poultry and fish supply lien under Food & Agric. Code Section 57510.

[TO BE ADDED IN SUBSEQUENT DRAFT]

18. Agricultural chemical and seed lien under Food & Agric. Code Section 57561.

[TO BE ADDED IN SUBSEQUENT DRAFT]

19. Lien for service of stallion, jack or bull under Civil Code Section 3062.

[TO BE ADDED IN SUBSEQUENT DRAFT]

20. Livestock servicer’s lien under Civil Code Section 3080.01.

[TO BE ADDED IN SUBSEQUENT DRAFT]

21. Lien on crops of a disabled veteran for operation of farm by Department of Veterans’ Affairs under Mil. & Vet. Code Section 987.9.

[TO BE ADDED IN SUBSEQUENT DRAFT]

II-E. Tax and Other Governmental Liens – Hidden Liens Report

1. Federal tax liens arising under the Internal Revenue Code against “all property and rights to property, whether real or personal” that belong to the taxpayer, 26 U.S.C. Section 6321.37

Statutory Framework of The Federal Tax Lien:

Section 6321 of the Internal Revenue Code (26 U.S.C. § 6321) provides:

lf any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

IRC § 6322 specifies the time at which this federal tax lien arises and its duration. IRC § 6223 sets out important rules concerning the validity and priority of the lien vis-à-vis various parties, including a secured party holding a security interest subject to Division 9 of the California Uniform Commercial Code. Section 6325 sets forth rules concerning the release of the lien.

How The Federal Tax Lien Arises:

IRC § 6321 states that failure to pay a tax due the United States after demand shall be a lien in favor of the United States against any property and rights to property of such person. Section 6322, however, states that “the lien imposed by Section 6321 shall arise at the time the assessment is made.”

Sections 6321 and 6322 appear inconsistent insofar as they suggest two different points for the attachment of the federal tax lien: Section 6321 speaks in terms of demand and failure to pay while Section 6322 speaks in terms of time of assessment. Notwithstanding such apparent inconsistency, case law is uniform in holding that Section 6322 fixes the attachment of the federal tax lien as of the date of assessment. See, e.g., U.S. v. Donahue Industries, Inc., 905 F.2d 1325, 1330-31 (9th Cir. 1990); Noriega & Alexander v. U.S., 859 F.Supp. 406. 409 (E.D. CA 1994). At the same time, the courts have also been clear that a demand for payment is required for the lien to be effective. See, e.g., In re Bertelt, 206 B.R. 579, 582 (Bankr. MD Fla 1996); Ind. Lumbermens’ Mut. Ins. Co. v. Construction Alternatives, Inc., 161 BR 949, 951 (Bankr. S.D. OH), affd. 2 F.3d. 670 (6th Cir. 1992). The apparent inconsistency between Section 6321 and 6322 can be reconciled first by recognizing that Section 6322 specifically addresses the time the lien arises while the broader language of Section 6321 addresses the requirements for the lien to be effective. A demand and failure to pay are the requirements to the validity of a tax lien, but the lien reaches all property of the taxpayer existing as of the “time of assessment” or arising thereafter.

IRS Form 4340 Certificate of Assessment and Payment is presumptive evidence that taxes have been duly assessed. See, e.g., Hefti v. I.R.S., 8 F.3d 1169, 1172 (7th Cir 1993); But see, Huff vs. U.S., 10 F.3d 1440, 1445-46 (9th Cir 1993) cert. denied, 512 U.S. 1219 (1994). (IRS could not rely solely on Form 4340 to prove valid assessment where form did not specify date on which assessment was made).

Perfection of Federal Tax Lien:

Section 6323(a) provides that unless the IRS has recorded a notice of tax lien that complies with Section 6323(f), a tax lien will not be valid against (i.e., have priority over) the interest of a purchaser, holder of a security interest, mechanic’s lien or judgment lien creditor. The filing of a notice of tax lien is required only to obtain priority over the classes of interests specified by Section 6323(a): the priority of the tax lien over other liens and interests (e.g., state tax liens) are determined under the principles of “first in time” and “choateness” without regard to a notice of the tax lien filing. (See discussion under “Priority of Lien”).

Section 6323(f) sets out rules on the content and place for filing the federal tax lien notice. Section 6323(f)(3) states that the form and content of the notice are to be prescribed by the Secretary, and — of paramount significance — that the notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of a lien. Section 6323(f)(5) states that the filing of a notice of tax lien is governed solely by the Internal Revenue Code. These provisions of Section 6323(f) make clear that the rules concerning the form, content and place of filing of the notice of tax lien contained in Section 6323 and the regulations promulgated hereunder preempt both state law — including the California Uniform Commercial Code — and other federal law.

Preemption of state law poses a number of challenges to the practitioner representing a secured party seeking to confirm the priority of its Article 9 security interest:

Priority Risks Associated with Debtor’s Name:

A secured party seeking to perfect a security interest under Division 9 through the filing of a financing statement must use the debtor’s correct name as specified in CUCC 9-503 in the filing statement. Pursuant to CUCC 9-506(c), an error in the name of the debtor is not necessarily fatal to the effectiveness of the financing statement if a search of the records under the debtor’s correct name using the filing office’s standard search logic would disclose the financing statement. However, if a search using the filing office’s standard search logic would not disclose the financing statement, it is “seriously misleading” and is not effective to establish the secured party’s priority.

The sufficiency of the debtor’s name in a notice of tax lien is not subject to the strictures of the filing office’s standard search logic imposed by CUCC 9-506(c). Instead, the sufficiency of a debtor’s name in a notice of tax lien is governed by a more lenient standard: whether a reasonable and diligent search would disclose the notice of the tax lien. While a practitioner need only conduct a search under the debtor’s correct name using the filing office’s standard search logic to search for other security interests governed by Division 9, the practitioner may be required to conduct searches using variants of the debtor’s correct name to search for notices of federal tax lien. See, e.g., In re Spearing Tool and Mfg. Co., 412 F.3d. 653 (6th Cir 2005), cert. den., 127 S.Ct. 41 (2006). Thus, failure of a search under the debtor’s correct name as specified by CUCC 9-503 using the filing office’s standard logic to disclose a notice of tax lien is not a sufficient basis to conclude that a tax lien is not entitled to priority.

Priority Risks Associated with Place of Filing:

Section 6323(f) prescribes different rules for the place of filing with respect to real property and personal property.

For real property, the notice is to be filed in the one office as designated by state law in which the real property is physically located. In California, the filing office is the county recorder’s office.

For personal property, the notice is to be filed in the one office designated under the laws of the State of the taxpayer’s residence at the time the notice is filed. A corporation or partnership is deemed to reside at the location of its principal executive office of business.

While Section 6323(f)’s place of filing rules for personal property was intended to correspond to the plan of filing rules under the Uniform Commercial Code, the rules do not correspond to the revised Uniform Commercial
Code now enacted. Under Section CUCC 9307, a “registered organization” is located under the state of the laws under which it is organized, not the jurisdiction of its principal place of business. Thus, a Delaware corporation is located in Delaware notwithstanding that its executive offices and principal place of business are located in California, and the practitioner must search for competing security interests in Delaware. This difference in filing requirements means that for “registered organizations” such as corporations and most partnerships, the practitioner must conduct a search for a notice of tax lien not only in the filing office of the state under which it is organized – – where all other security interests are recorded – – but also in the filing office of the state in which the taxpayers’ principal executive office of business is located in order to capture notices of tax liens.

Priority Risks Associated with Change in Taxpayer’s “Residence”:

A notice of tax lien is effective for a period of ten (10) years and thirty (30) days from the date of assessment, but can be renewed by refiling during such period. The IRS is not required to refile its notice of tax lien within the ten (10) year period based on a change in the debtor taxpayer’s residence. Thus the practitioner cannot rely on searches of the filing office of the state of the debtor’s current residence, but must conduct searches in the state of the debtor’s prior residences, i.e., all former principal executive offices of business.

Priority of Federal Tax Lien:

The federal tax lien has existed, in one form or another, for over one hundred years. Prior to the Federal Tax Lien Act of 1966, the priority of the federal tax lien vis-à-vis other liens, was determined under the common law principles of “first in time is first in right” and “choateness”. Application of these principles to resolve priority of lien rights proved problematic for secured lenders, particularly a lender sought to rely on a “floating lien” on accounts and inventory because the consensual lien could not attach and enjoy priority as to accounts and inventory not then in existence. As a consequence, a tax lien was deemed to have priority over existing security interests in accounts and inventory arising or acquired after the time the tax lien came into existence. In enacting Section 6323, Congress sought to achieve a certain balance between the rights of the United States and the rights of other lienholders — including the lender with a “floating lien” — that would accommodate the needs of commercial finance as well as other societal interests.

Section 6323(a) states the first basic rule of priority of the federal tax lien:

The lien imposed by Section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanics lien or judgment lien creditor until notice thereof which meets the requirement of subsection (f) has been filed.

Section 6323(a) requires the IRS to “perfect” its lien by filing a notice of tax lien to enjoy priority, but only where the competing interest is that of a purchaser, holder of a security interest, judgment lien creditor or mechanic’s lien. The priority of other liens, notably state tax liens and other statutory liens, is still determined under the common law principles of “first in time” and “choateness”.

Sections 6323(b) through (d) delineate the priority of the tax lien where a notice of tax lien has been filed. Each of these subsections is discussed in further detail below:

Section 6323(b) is a quiltwork of special priority rules based on the nature of the collateral and/or the nature of the competing lien or interest. The provisions of 6323(b) provide separate rules for:

Securities (b)(1)Personal Property purchased at retail (b)(3)Personal property subject to possessory lien (b)(5)Residential property subject to mechanic’s liens (b)(7)Insurance Contracts (b)(9)Motor Vehicles (b)(2)Personal property purchased at retail sale (b)(4)Real property, taxes and assessments (b)(6)Attorneys liens (b)(8)Deposit-secured accounts (b)(10)

Section 6323(d) provides a limited priority for a security interest which comes into existence by reason of disbursements made before the 46th day after the date of filing of the notice of the tax lien. In order to enjoy priority under subsection (d):

  • The disbursements must be made without actual notice or knowledge of the tax lien;
  • The security interest must be covered by the terms of a written agreement entered into before the tax lien filing;
  • The security interest is in property subject to the tax lien at the time of the tax lien filing; and
  • The security interest is protected under local laws (e.g., Division 9 of the California Uniform Commercial Code) as of the time of the tax lien filing against a judgment lien arising from an unsecured obligation.

In sum, Section 6323(d) will provide continued priority for advances made without knowledge of the tax lien with the first 45 days after the tax lien filing in property existing as of the time of the tax lien filing. The priority provided by Section 6323(d) is limited to property existing as of the tax lien filing and does not extend to property acquired or coming into existence after the filing: priority does not extend to accounts or inventory acquired or arising within the 45 day period after the tax lien filing.

Section 6323(c)

In contrast to Section 6323(d), Section 6323(c) provides priority as to both disbursements made and property acquired after the tax lien filing, but only for certain transactions. In order to obtain priority under Section 6323(c), a security interest must satisfy four requirements:

  • The security interest must have priority under local applicable law against a hypothetical judgment lien arising as of the time of the tax lien filing, out of an unsecured transaction.
  • The security interest must be created by a written agreement entered into before the tax lien filing;
  • The written agreement must constitute either a commercial transaction financing agreement, a real property construction or improvement financing agreement, or an obligatory disbursement agreement; and
  • The security interest is entitled to priority only to the extent it is in “qualified property,” a defined term whose scope varies depending on the category of written agreement involved.
  • Obligatory Disbursement Agreement. An “obligatory disbursement agreement” is an agreement entered into by a person in the course of his trade or business to make disbursements, but only to the extent such disbursements are required by reason of the intervention of the rights of a person other than the taxpayer. This definition covers an agreement creating a suretyship-type relationship. For example, agreements granting a security interest to secure the taxpayer’s obligation to reimburse or indemnify the issuer of a letter of credit or performance bond or a guarantor qualify as “obligatory disbursement agreements.”

Where the security interest arises under an “obligatory disbursement agreement,” “qualified property” is limited to property subject to the lien as of the time of the tax lien filing together with property thereafter acquired to the extent its acquisition is directly traceable to the disbursements made under the obligatory disbursement agreement.

  • Real Property Construction or Improvement Financing Agreement. A “real property construction or improvement financing agreement” means an agreement to make cash advances (the furnishing of goods or services is deemed a cash disbursement) to finance the construction or improvement of real property or a contract to be the same; or the raising or harvesting of a farm crop or livestock. Where the agreement is a “real property construction or improvement fina
    ncing agreement,” “qualified property” is limited to the real property improved, the contract financed or where a crop or livestock is being financed, the crop or livestock in existence as of the time of notice of the tax lien.
  • Commercial Transaction Financing Agreement. A “commercial transaction financing agreement” is an agreement entered into by a person in the course of his trade or business to make loans secured by or purchase “commercial financing security” acquired by the taxpayer in the ordinary course of its business, provided that an agreement shall come within the definition only to the extent that the loan or purchase is made before the earlier of (i) the 46th day after the tax lien filing; or (ii) the date the lender/purchaser has actual notice or knowledge of the tax lien filing. “Commercial financing security” means commercial paper, accounts, mortgages or real property and inventory. Where the agreement is a commercial transaction financing agreement, “qualified property” is limited to “commercial financing security” acquired by the taxpayer before the 46th day after the tax lien filing. Thus, with respect to a security interest arising under a commercial transaction financing agreement, the lender/purchaser is afforded priority as both disbursements made (assuming no notice or knowledge of the tax lien filing) and property acquired before the 46th day after the tax lien filing.

Obligations Secured by Tax Lien:

Section 6321 provides that the tax lien secures the amount of “any tax,” together with any “interest, additional amount, addition to tax, or assessable penalty, together with any costs that may have accrued in addition thereto.” The case law confirms the broad scope of the tax lien: it covers all taxes due the United States (i.e., federal taxes) for which the debtor may be liable. See, U.S. v. Cleavenger, 325 F.Supp.871, 874-75 (N.D. Ind. 1971). This tax lien covers federal income tax as well as all federal withholding taxes.

While the language of Section 6321 is broad enough to encompass all federal taxes for which a person may be liable, including estate taxes, Section 6324 creates specific liens for estate taxes and gift taxes that are of an “in rem” nature, that is, limited to the value of the property received. Estate liens under Section 6324 attach upon the death of the decedent and do not require assessment or demand to be effective, although pursuant to Section 6324(c)(1), such lien will have priority over liens to the same extent of the general tax lien per Section 6323(b).

Property Subject to Federal Tax Lien

The lien arising under Section 6321 attaches to “all property and rights to property, whether real or personal” of the debtor. The language of the statute is intentionally broad and intended to reach every species of right or interest protected by law and having an exchangeable value. Drye v. U.S., 528 U.S. 49, 56 (1999); See also, In Re Raihl, 152 BR 615, 617 (9th Cir.BAP 1993). The federal tax lien attaches to all property of the person liable for the tax, including property otherwise exempt from levy or execution under state or federal law. See, Medaris v. U.S., 884 F.2d 832, 833-34 (5th Cir. 1989) (Texas statute exempting spouse’s earnings from debtor spouse’s creditors ineffective as to a tax lien); In Re Raihl, 152 B.R. 615 (9th Cir. BAP 1993) (pension funds subject to tax lien even though plans qualified as spend thrift trust and not property of bankruptcy estate).

The Classes of Lienor and Lienee Subject to Lien:

The United States is the only party entitled to assert a federal tax lien. Any individual or legal entity that is liable for a federal tax is subject to having its property encumbered by a federal tax lien arising under Section 6321, and Section 6324 creates a tax lien upon the property of a probate estate. The property of a party other than the “person liable to pay” the tax may be encumbered by a federal tax lien under an alter ego/nominee theory. See, e.g., Cody vs. U.S., 348 F. Supp. 2d. 682 (E.D. VA 2004).

Measures to Protect Against Risks of Federal Tax Lien:

Due Diligence. A secured creditor should consider conducting the following due diligence in connection with the priority risks posed by a potential federal tax lien:

  1. Conduct UCC searches in the filing office of the state of debtor’s residence. In the case of a debtor that is not an individual, this includes a search in all states where the debtor’s “principal executive office of business” is located.
  2. To comply with the “reasonable and diligent” standard applicable to notices of federal tax lien, conduct UCC searches not only under the debtor’s correct name, but commonly occurring variants. This may involve both searches under the filing offices’ standard search logic as well as searching by searches that employ broader, more error tolerant, search logic.
  3. Search in filing offices of states of debtor’s former residences (at least for 10 years).

Standard provisions that a secured party may include in its security agreement with respect to protecting against losing priority to a federal tax lien include:

  1. Having the debtor covenant to timely pay all federal taxes and to promptly notify secured party of any (i) failure to pay taxes; (ii) assessment of taxes; or (iii) notice of tax lien.
  2. Making a failure to pay taxes (subject to an exception for taxes disputed in good faith), an assessment of taxes or the filing of a notice of tax lien an event of default.
  3. Entitling secured party to pay the amount to discharge a tax lien and add such amounts to the principal and interest to its secured obligations.

In addition to requiring the debtor to covenant with respect to the tax assessments and notices of tax lien, the secured party should consider making periodic searches of the filing office of the state of the debtor’s residence for potential notices of tax lien.

2. Unpaid Sales and Use Taxes under Rev. & Tax. Code Section 6757. 38

Statutory Framework:

Revenue and Taxation Code § 6757 provides as follows:

  1. If any person fails to pay any amount imposed under this part at the time that it becomes due and payable, the amount thereof, including penalties and interest, together with any costs in addition thereto, shall thereupon be a perfected and enforceable state tax lien. The lien is subject to Chapter 14 (commencing with Section 7150) of Division 7 of Title 1 of the Government Code.
  2. For the purpose of this section, amounts are “due and payable” on the following dates:
    1. For amounts disclosed on a return received by the board before the date the return is delinquent, the date the return would have been delinquent;
    2. For amounts disclosed on a return filed on or after the date the return is delinquent, the date the return is received by the board;
    3. For amounts determined under Section 6536 (pertaining to jeopardy assessments), the date the notice of the board’s finding is mailed or issued;
    4. For all other amounts, the date the assessment is final.
  3. The lien provided by this section shall not arise during any period that Section 362 of the United States Bankruptcy Code applies to the person against whom the lien would otherwise apply.

How the Lien Arises/Attaches:

The lien for unpaid sales and use taxes is a state tax lien that arises at the time the tax is due and payable. Revenue and Taxation Code § 6757(a). See also Government Code § 7162 which provides, among other things, that a “[s]tate tax lien” means a lien created pursuant to … Section 6757, …. Revenue and Taxation Code § 6757(a) provides that the amount of any delinquent sales and use taxes, together with the applicable penalties, interest, and costs
are a perfected and enforceable state tax lien under Government Code §§ 7150 et seq. Notwithstanding the foregoing, if the taxpayer is the subject of a bankruptcy proceeding, and the automatic stay under Section 362 of the Bankruptcy Code is in effect, then the lien will not arise. (Revenue and Taxation Code § 6757(c)).

This lien for unpaid sales and use taxes attaches to all property and rights to property whether real or personal, tangible or intangible, including all after-acquired property and rights to property, belonging to the taxpayer and located in the State of California. (Government Code § 7170(a)). A state tax lien attaches to a dwelling notwithstanding the prior recording of a homestead declaration. (Government Code § 7170(a)).

Perfection of the Lien:

The lien for unpaid sales and use taxes is perfected at the time it arises with no further act required. (Revenue and Taxation Code § 6757(a)).

Priority of the Lien:

Revenue and Taxation Code § 6756 provides:

The amounts required to be paid by any person under this part together with interest and penalties shall be satisfied first in any of the following cases:

  1. Whenever the person is insolvent.
  2. Whenever the person makes a voluntary assignment of his assets.
  3. Whenever the estate of the person in the hands of executors, administrators, or heirs is insufficient to pay all the debts due from the deceased.
  4. Whenever the estate and effects of an absconding, concealed, or absent person required to pay any amount under this part are levied upon by process of law.

This section does not give the state a preference over any lien or security interest which was recorded or perfected prior to the time when the state records or files its lien as provided in Section 7171 of the Government Code.

The preference given to the state by this section shall be subordinate to the preferences given to claims for personal services by Sections 1204 and 1206 of the Code of Civil Procedure.

The lien for unpaid sales and use taxes has priority over ordinary debts in cases of insolvency, voluntary assignment of assets, administration of an insolvent decedent’s estate, and where the estate and effects of an absconding, concealed, or absent person are levied on by process of law. (Revenue and Taxation Code § 6756). But, the following liens and security interests are prior to the lien for unpaid sales and use taxes:

  1. A lien recorded or a security interest perfected prior to the time the state recorded or filed its lien. Revenue and Taxation Code § 6756; see also Government Code §§ 7170 and 7171.
  2. Claims for personal services under Code of Civil Procedure §§ 1204 and 1206. Revenue and Taxation Code § 6756.

Thus, while not necessary for perfection of the state tax lien, in order to establish priority the state must record its notice of state tax lien. With respect to real property, the state may record in the office of the county recorder of the county in which the real property is located. (Government Code § 7170(b)). With respect to personal property, the state may file a notice of state tax lien with the Secretary of State. (Government Code § 7170(c); see also Government Code §§ 7220-7229). In addition, Government Code § 7171(c) requires that the notice of state tax lien contain the following information:

  1. the name and last known address of the taxpayer.
  2. the name of the agency giving notice of the lien.
  3. the amount of the unpaid tax.
  4. a statement that the amount of the unpaid tax is a lien on all real or personal property and rights to that property, including all after-acquired property and rights to property, belonging to the taxpayer.
  5. a statement that the agency has complied with all of the provisions of the applicable law for determining and assessing the tax.

(See also Government Code §§ 7220-7229).

The Obligations Secured by the Lien:

The lien created under Revenue and Taxation Code § 6757 secures the amount of any delinquent sales and use taxes, together with the applicable penalties, interest, and costs. (Revenue and Taxation Code § 6757(a)).

The Collateral Subject to the Lien:

This lien for unpaid sales and use taxes attaches to all property and rights to property whether real or personal, tangible or intangible, including all after-acquired property and rights to property, belonging to the taxpayer and located in the State of California. (Government Code § 7170(a)). A state tax lien attaches to a dwelling notwithstanding the prior recording of a homestead declaration. (Government Code § 7170(a)).

The Classes of Secured Party/Debtor Subject to the Lien:

Any person who fails to pay any amount of sales tax, including penalties, interests and costs is a debtor subject to the hidden lien created by Revenue and Taxation Code § 6757. Secured parties who take as collateral any property, real or personal, of the debtor may find that their collateral is subject to a prior hidden lien under Revenue and Taxation Code § 6757. However, while it is not necessary for perfection of this hidden state tax lien, in order to establish priority, the state must record its notice of state tax lien with respect to real property in the office of the county recorder of the county in which the real property is located (Government Code § 7170(b)) and with respect to personal property with the office of the Secretary of State (Government Code § 7170(c) and Government Code §§ 7220-7229).

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Secured lenders can protect themselves against the hidden lien created under Revenue and Taxation Code § 6757 by: (a) performing a tax lien search simultaneously with the Commercial Code search of the debtor in the Office of the Secretary of State of California; and (b) performing a lien search of the county records of the county where the debtor owns real property prior to funding its loan to confirm that there are no state tax liens on the assets of the debtor with priority over the secured parties lien.

3. Unpaid unemployment compensation taxes under Unemp. Ins. Code Section 1703.

[TO BE ADDED IN SUBSEQUENT DRAFT]

4. Tax liens generally. See Government Code Section 7171 (state tax lien); Rev. & Tax Code Sections 2191.3-.6 (county tax liens); Pub. Res. Code Section 4178 (fire hazard abatement); Rev. & Tax. Code Section 11491-11496 (taxes on private railroad cars).

[TO BE ADDED IN SUBSEQUENT DRAFT]

5. Environmental contamination giving rise to liens under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601(1) et seq. (CERCLA). 39

Statutory Framework:

Section 107(l)(1) of CERCLA provides as follows:

All costs and damages for which a person is liable to the United States under subsection (a) of this section (other than the owner or operator of a vessel under paragraph (1) of subsection (a)) shall constitute a lien in favor of the United States upon all real property and rights to real property which:

  1. belong to such person and
  2. are subject to or affected by a removal or remedial action

Section 107(m) of CERCLA provides as follows:

All costs and damages for which the owner or operator of a vessel is liable under subsection (a)(1) with respect to a release or threatened release from such vessel shall constitute a maritime lien in favor of the United States on such vessel. Such costs may be recovered in an action in rem in the district court of the United States for the district in which the vessel may be found. Nothing in this subsection sha
ll affect the right of the United States to bring an action against the owner or operator of such vessel in a court of competent jurisdiction to recover such costs.

Section 107(r)(1) of CERCLA provides an exception to liability under subsection (a)(1) to a bona fide prospective purchaser who does not impede a restoration or response action being taken with respect to the property being purchased. However, Section 107(r)(2) of CERCLA provides as follows:

  1. If there are unrecovered response costs incurred by the United States at a facility for which an owner of the facility is not liable by reason of paragraph (1), and if each of the conditions described in paragraph (3) is met, the United States shall have a lien on the facility, or may by agreement with the owner, obtain from the owner a lien on any other property or other assurance of payment satisfactory to the Administrator, for unrecovered response costs.
  2. The conditions set forth in paragraph (3) are that (i) the United States must have unrecovered costs for response actions carried out at the facility and (ii) the fair market value of the facility increases as a result of the response action.

How the Lien Arises/Attaches:

CERCLA contains three subsections creating liens in favor of the United States for environmental liabilities. Subsection (a) of Section 107 of CERCLA sets forth the persons, subject to certain exceptions, who may be subject to liability and subsection (b) of that section sets forth defenses to liability.

The lien under Section 107(l) of CERCLA arises at the time the United States first incurs costs with respect to a response under CERCLA or when a person receives written notice of potential liability under CERCLA, whichever is later. This lien remains in effect until the earlier of when all the costs and liabilities the lien secures are paid or the lien becomes unenforceable by operation of the statute of limitations. Section 113 of CERCLA [42 U.S.C. § 9613] contains the statute of limitations.

The lien under Section 107(m) of CERCLA is a maritime lien and would attach in accordance with maritime law.

The lien under Section 107(r) of CERCLA arises at the time the U.S. first incurs costs with respect to a response action at the facility. The lien under Section 107(r) of CERCLA remains in effect until the earlier of when the obligations securing the lien have been paid or, without giving effect to the statute of limitations, the United States recovers all response costs incurred with respect to the facility.

Perfection of the Lien:

The statutory lien arising under Section 107(l) of CERCLA must be filed with the appropriate office for the filing of such liens within the State, county or other governmental subdivision where the real property is located or, if State law does not designate one office to receive such notices, then with the clerk of the United States district court in the district where the real property is located.

The statutory lien arising under Section 107(m) of CERCLA would be perfected in accordance with maritime law. A person claiming a maritime lien may file a notice of lien with the Secretary of Transportation pursuant to 46 U.S.C. § 31343.

The statutory lien arising under Section 107(r) of CERCLA extends to a “facility.” Section 101(9) of CERCLA [42 U.S.C. § 9601] defines a “facility” as “(A) any building, structure installation, equipment, pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed of, or placed or otherwise located; but does not include any consumer product in consumer use or any vessel.” Due to the breadth of this definition, the manner of perfecting the lien will depend on what assets comprise the facility.

Priority of the Lien:

Section 107(l)(3) of CERCLA provides that:

The lien imposed by this subsection shall be subject to the rights of any purchaser, holder of a security interest, or judgment lien creditor whose interest is perfected under applicable State law before written notice of the lien has been filed with the appropriate office within the State (or county or other governmental subdivision), as designated by State law, in which the real property subject to the lien is located. Any such purchaser, holder of a security interest, or judgment lien creditor shall be afforded the same protections against the lien imposed by this subsection as are afforded under State law against a judgment lien which arises out of an unsecured obligation and which arises as of the time of the filing of the notice of the lien imposed by this subsection.

Section 107(m) and Section 107(r) of CERCLA are silent on priority of the liens arising under those subsections.

The Obligations Secured by the Lien:

The lien created under Section 107(l) secures all costs and damages for which a person (other than an owner or operator of a vessel) is liable to the United States under subsection (a) of that section. The costs and damages for which a person may be liable under Section 107(a)(1) are:

  1. all costs of removal or remedial action incurred by the United States Government or a State or Indian tribe not inconsistent with the national contingency plan;
  2. any other necessary costs of response incurred by any other person consistent with the national contingency plan;
  3. damages for injury to, destruction of, or loss of natural resources, including the reasonable costs of assessing such injury, destruction, or loss resulting from such a release; and
  4. the costs of any health assessment or health safety effects study carried out under Section 104(i) [42 U.S.C. § 9604(i)].

A person is also liable to the United States for interest, accruing at the rate specified in subsection (a), on the costs and damages described above. In addition, a person may be liable for punitive damages in certain circumstances under subsection (c)(3).

The lien created under Section 107(m) of CERCLA secures the obligations described in subsection (a) of that section for which an owner or operator of a vessel is liable as a result of releases or threatened releases from the vessel.

The lien created under Section 107(r) of CERCLA secures the unrecovered response costs incurred by the U.S. at the facility up to the amount by which the fair market value of the property increased at the time of the sale or other disposition of the property due to the response action.

The Collateral Subject to the Lien:

The lien created under Section 107(l) of CERCLA is applicable to the real property and rights thereto that is subject to or affected by a removal or remedial action for which the person who owns the property is subject to liability under subsection (a).

The lien created under Section 107(m) of CERCLA is applicable to the vessel from which there is a release or threatened release giving rise to liability under subsection (a).

The lien created under Section 107(r) of CERCLA is applicable to a facility for which the owner is not liable for unrecovered response costs by reason of Section 107(r)(1) or to such other property as may be agreed to by the U.S. and the owner of the facility.

The Classes of Secured Party/Debtor Subject to the Lien:

  1. Secured parties who take as collateral real property or vessels are subject to the hidden lien arising under Section 107 of CERCLA.
  2. Debtors who own or purchase real property or own or operate vessels are subject to the lien arising under Section 107 of CERCLA.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Lenders can obtain priority over the liens created under Section 107 of CERCLA an
d protect themselves against this hidden lien by (a) performing a title search on any real property, and a search of the district court where the real property is located, that will serve as collateral, (b) requiring Phase I environmental reports for real property that will serve as collateral, (c) performing a search with the Secretary of Transportation to determine if any notices have been filed with respect to vessels that will constitute collateral, (d) performing a search of the applicable Secretary of State’s Commercial Code filing records prior to funding their loan to confirm that there are no other liens, (e) performing appropriate searches for other collateral owned by the Debtor and constituting a facility as defined in CERCLA, (f) timely filing mortgages, financing statements, etc., (g) requiring borrowers to make representations and warranties in the loan documents as to environmental matters, including the past and present compliance with environmental laws and environmental liabilities, (h) providing for affirmative covenants in the loan documents with respect to compliance with environmental laws and (i) providing a negative covenant in the loan documents restricting liens arising from environmental liabilities.

6. ERISA liens under 29 U.S.C. Section 1368. 40

Statutory Framework:

This lien arises under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001-1461.

How the Lien Arises/Attaches:

ERISA provides the following in 29 U.S.C. § 1368(a):

If any person liable to the corporation [viz., the Pension Benefit Guaranty Corporation — see 29 U.S.C. § 1301] under Section 1362, 1363, or 1364 of this title [see below] neglects or refuses to pay, after demand, the amount of such liability (including interest), [THEN:] there shall be a lien in favor of the corporation in the amount of such liability (including interest) upon all property and rights to property, whether real or personal, belonging to such person, except that such lien may not be in an amount in excess of 30 percent of the collective net worth of all persons described in Section 1362 (a) of this title.

Perfection of the Lien:

Under 29 U.S.C § 1368(c), this ERISA lien is perfected when the Pension Benefit Guaranty Corporation files a notice of the lien in the place that a federal tax lien would be filed as provided in the Internal Revenue Code, 26 U.S.C. § 6323(f).

The Obligations Secured by the Lien:

Generally speaking, this ERISA lien secures the obligation of an employer and its “controlled group” (discussed below) to fund the benefits of a single-employer, defined-benefit pension plan, IF (i) the plan is terminated in (x) a “distress” termination or (y) by the Pension Benefit Guaranty Corporation, or (ii) in certain circumstances, if a “substantial employer” withdraws from the plan. See 29 U.S.C. §§ 1368(a) and 1362-1364.

The Collateral Subject to the Lien:

Under 29 U.S.C. § 1368(a), this ERISA lien applies to “all property and rights to property, whether real or personal, belonging to such person [see below], except that such lien may not be in an amount in excess of 30 percent of the collective net worth of all persons described [below].”

The Classes of Secured Party/Debtor Subject to the Lien:

Under 29 U.S.C. § 1362(a), this ERISA lien applies to property of “any person who is, on the termination date [of the single-employer defined-benefit pension plan], a contributing sponsor of the plan or a member of such a contributing sponsor’s controlled group [which consists, in essence, of all “persons” under common control with the contributing sponsor],” if that person refuses a demand for payment by the Pension Benefit Guaranty Corporation.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

  1. Obtain a rep that (i) the person is not a member of a “controlled group” for a single-member defined-benefit pension plan, and/or (ii) the pension plan has not been subject to a “distress” termination, etc., and/or (iii) the pension plan has fully funded its pension liabilities; and/or (iv) the person has not received a demand for payment by the Pension Benefit Guaranty Corporation.
  2. When checking for federal tax liens, also check for ERISA liens.

7. Lien for public employees’ retirement systems under Government Code Section 20574. 41

Statutory Framework:

Government Code § 20574 provides in full:

A terminated agency shall be liable to the system for any deficit in funding for earned benefits, as determined pursuant to Section 20577, interest at the actuarial rate from the date of termination to the date the agency pays the system, and for reasonable and necessary costs of collection, including attorney’s fees. The board shall have a lien on the assets of a terminated contracting agency, subject only to a prior lien for wages, in an amount equal to the actuarially determined deficit in funding for earned benefits of the employee members of the agency, interest, and collection costs. The assets shall also be available to pay actual costs, including attorneys’ fees, necessarily expended for collection of the lien.

How the Lien Arises/Attaches:

The lien arises if a contracting agency remains liable to the retirement system for a deficit in funding for earned benefits after such contracting agency’s contract with the Board of Administration of the Public Employees’ Retirement System (the “Board”) for retirement benefits has been terminated. Such contract may be terminated by either the contracting agency or the Board in the following circumstances: A contracting agency generally has the right to terminate such contract if the contract has been in effect for at least five years and the governing body of such contracting agency adopts a resolution or ordinance, with the affirmative vote of two-thirds of the members of such governing body, terminating such contract. The Board has the right to terminate such contract by a majority vote of its members if the contracting agency fails for thirty days after demand by the Board to pay any installment of contributions required by its contract or fails to file any required information, or if the Board determines that the agency is no longer in existence.

Perfection of the Lien:

The statute is silent on how to perfect the lien or whether perfection is necessary.

Priority of the Lien:

The statute provides that the lien is subject only to a prior lien for wages owed by the terminated contracting agency.

The Obligations Secured by the Lien:

The lien secures the deficit in funding for earned benefits owed by the contracting agency as determined pursuant to Government Code § 20577, accruing interest and collection costs.

The Collateral Subject to the Lien:

The statute provides that the Board shall have a lien on the assets of the contracting agency. Though not entirely clear, the lien presumably is a blanket lien over all assets of the contracting agency.

The Classes of Secured Party/Debtor Subject to the Lien:

The secured party is the Board. The debtor is the contracting agency which is defined as any public agency that has elected to have all or any part of its employees become members of the retirement system and that has contracted with the Board for that purpose. Contracting agency is also defined as any county office of education, school district, or community college district that has elected to have all or part of its emp
loyees participate in a risk pool and that has contracted with the Board for that purpose.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

The risk of being primed by this lien only arises if the debtor is a public agency. In such a circumstance, the secured party should ensure that the debtor has not recently terminated a contract for retirement benefits with the Board where the debtor has continuing liabilities. It may be prudent to retain the advice of an attorney who specializes in the area of public employee benefits to confirm one’s understanding.

8. Liens for unpaid wages pursuant to the “hot goods” section of the federal Fair Labor Standards Act, 29 U.S.C. Section 215(a)(1). 42

Statutory Framework:

Section 215(a)(1) of the Fair Labor Standards Act provides that:

… [I]t shall be unlawful for any person to transport, offer for transportation, ship, deliver, or sell in commerce, or to ship, deliver, or sell with knowledge that shipment or delivery or sale thereof in commerce is intended, any goods in the production of which any employee was employed in violation of Section 206 or Section 207 of this title, or in violation of any regulation or order of the Secretary issued under Section 214 of this title; except that no provision of this chapter shall impose any liability upon any common carrier for the transportation in commerce in the regular course of its business of any goods not produced by such common carrier, and no provision of this chapter shall excuse any common carrier from its obligation to accept any goods for transportation; and except that any such transportation offer, shipment, delivery, or sale of such goods by a purchaser who acquired them in good faith in reliance on written assurance from the producer that the goods were produced in compliance with the requirements of this chapter, and who acquired such goods for value without notice of any such violation, shall not be deemed unlawful.

How the Lien Arises/Attaches:

In Citicorp Industrial Credit, Inc. v. Brock, Secretary of Labor, 483 U.S. 27 (1987), the Supreme Court held that no lien is actually created under 29 U.S.C. § 215(a)(1) of the Fair Labor Standards Act (29 U.S.C. §§ 201-219) (the “FLSA” or the “Act”), which is commonly known as the “Hot Goods” provision of the FLSA. Rather, the possessor of goods manufactured in violation of the minimum wage or overtime requirements of the FLSA may be enjoined from selling, transferring, shipping or otherwise injecting those items into interstate commerce until the employees involved in the production of those goods are paid.

In Citicorp, the Supreme Court considered whether the Hot Goods provision “applies to holders of collateral obtained pursuant to a security agreement.” Citicorp, 483 U.S. at 29. Citicorp entered into a financing agreement with the predecessor-in-interest of Ely Group, Inc. (collectively, “Ely”) in which Citicorp agreed to lend to Ely the sum of $11 million. To secure the loan, Ely granted to Citibank a lien in its inventory, accounts receivable, and other assets, and the lien was perfected under applicable state law. Id. Ultimately, Ely became insolvent and had to close its manufacturing facilities. Citicorp foreclosed on its liens, and took possession of its collateral, including inventory manufactured by Ely’s employees whose wages had not been paid in violation of the FLSA. Id. When Citicorp attempted to sell its collateral, an injunction was obtained by the Secretary of Labor. Id. at 30.

The Court noted that there are only two exceptions to the Hot Goods provision of the FLSA: (1) common carriers, and (2) ultimate purchasers without notice. Id. at 33-34. Otherwise, “all other persons, innocent or not, are subject to § 15(a)(1).” Id. at 34 (emphasis in original). Consequently, the Court affirmed the injunction issued by the lower courts prohibiting Citicorp from disposing of the collateral, noting that Citicorp “can cure the employer’s violation of the FLSA by paying the employees the statutorily required wages . . “. but that this “… does not give the employees a ‘lien’ on the assets superior to that of a secured creditor.” Citicorp, 483 U.S. at 38-39.

Perfection of the Lien:

As no lien is actually created under the Hot Goods provision, there are no requirements for perfection. However, as the Court stated in Citicorp, “secured creditors take their security interests subject to the laws of the land.” Id. at 39. So, an injunction may be issued by a court of competent jurisdiction against the possessor of such collateral upon proof that the collateral was manufactured in violation of the FLSA, and that there is no applicable exception. The injunction will remain in effect so long as the workers’ wages remain unpaid.

Priority of Lien:

Again, the Court in Citicorp noted that a “literal application of § 15(a)(1) does not grant employees a priority in ‘hot goods’ superior to that which a secured creditor has under state law.” Citicorp, 483 U.S. at 38. Rather, the secured creditor “still owns the goods, subject only to the ‘hot goods’ provision, which prevents it from placing them in interstate commerce.” Id.

Obligations Secured by the Lien:

Any injunction granted for a violation of the Hot Goods provision would terminate once the wages due in connection with the Hot Goods are paid to the employees.

Collateral Subject to Lien:

Any goods produced by a manufacturer who fails to comply with the minimum wage or overtime wage provisions of the FLSA. See 29 U.S.C. § 215(a)(1).

Classes of Secured Party/Debtor Subject to the Lien:

  • The “secured party” would be the employees who have not yet received their wages in accordance with Sections 6 and 7 of the Act.

The “debtor” would be the secured party or other possessor of the “hot goods,” who must pay the unpaid wages before it can dispose of or otherwise use the collateral in interstate commerce.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

As stated above, the Hot Goods provision includes two (2) exceptions: the first is for common carriers; and the second is for purchasers who acquire Hot Goods in good faith reliance on written assurance from the producer that the goods were produced in compliance with the requirements of the Act, and “who acquired such goods for value without notice of any such violation …” 29 USC § 215(a)(1). In Citicorp, the petitioner (a secured creditor) did not argue that it was covered under either exception. Id. at 34. Rather, Citicorp argued that there should be an exception for innocent secured creditors, which the court rejected, in part, because there was “no duty to ascertain compliance with the FLSA.” Id. at 35. Consequently, when taking a security interest in goods, the secured party should, at a minimum, require written representations and warranties from the debtor that the goods are being manufactured in compliance with the FLSA.

The Court in Citicorp also focused on the reporting requirements involved in Citicorp’s loan to Ely, and noted that “[s]ecured creditors often monitor closely the operations of employer-borrowers … and may be in a position to insist on compliance with the FLSA’s minimum wage and overtime requirements.” Citicorp, 483 U.S. at 37. It follows that a secured creditor should include in its security agreements a covenant to comply with the FLSA.

Finally, since a secured party takes its collateral subject to the Hot Goods provision, which prevents i
t from placing them in interstate commerce until the workers’ wages are paid, a secured creditor should require indemnification from the debtor and all guarantors for any costs or expenses incurred in connection with lifting any injunction imposed pursuant to the Hot Goods provision of the FLSA, including, without limitation, the payment of any wages to employees involved in manufacturing goods constituting collateral for the secured party’s loan to the debtor.

Miscellaneous:

While the Court in Citicorp did not address the application of the Hot Goods provision in a bankruptcy context, the Sixth Circuit Court of Appeals addressed this issue in Chao v. Hosp. Staffing Serv., Inc., 270 F.3d 374 (6th Cir. 2001). In Chao, the court rejected the holding of the Eleventh Circuit Court of Appeals in Brock v. Rusco Indus., 842 F.2d 270 (11th Cir. 1988), which held that “a ‘hot goods’ action falls within the [11 USC] § 362 (b)(4) police power exception to the automatic stay.” Chao, 270 F.3d at 387 (citing Brock, 842 F.2d at 273). To determine whether this exception to the automatic stay applies in a particular Hot Goods action, the Chao Court applied two separate tests: a “pecuniary interest test,” and a “public policy” test. See Chao, 270 F.3d at 388-89, and 394. The pecuniary interest test focuses on “whether the enforcement action would result in a pecuniary advantage to the government vis-à-vis other creditors of the bankruptcy estate.” Id. at 389 (fn. 9) (emphasis in original). The Chao court concluded that since the Secretary’s suit seeks only an injunction to prevent the bankruptcy trustee from introducing the goods in question into interstate commerce, there is no pecuniary gain to the government. Consequently, the Chao court found that the pecuniary interest test had been satisfied. Id. at 389.

The public policy test asks “whether a governmental unit brought suit ‘to enforce such governmental unit’s … police and regulatory power” to vindicate private rights or serve a public good. See Chao, 270 F.3d at 394. Because of the nature of the Hot Goods involved (records the bankruptcy trustee intended to use to create accounts receivable), the Chao court concluded that “the Secretary’s enforcement action does not protect other workers in the economy because the records at issue here will not — unlike garments or windows and doors — enter commerce and compete with fairly produced goods … the injunction action is merely a vehicle to enforce the private rights of the employees to minimum portion of their wages Congress guaranteed.” Id. at 393-394. The Chao court held that “the § 362 (b)(4) exception to the automatic stay does not apply to the instant action” and the Bankruptcy Court “had exclusive jurisdiction over the debtor and the property of its bankruptcy estate.” Id. at 394.

9. Claims arising under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sections 1961 et seq. (RICO) (relating back to date of violation).

[TO BE ADDED IN SUBSEQUENT DRAFT]

10. Liens for Utility and Related Services.

a. Lien for special assessment with respect to the weed and rubbish abatement under Government Code Section 39577. 43

Statutory Framework:

This lien arises under Government Code § 39577.

How the Lien Arises/Attaches:

Government Code Section 39561 permits the legislative body of a city, by resolution, to abate, as a nuisance, “weeds” (as defined in Section 39561.5), rubbish, refuse, and dirt, on private property:

The legislative body may declare by resolution as public nuisances, and abate: (a) All weeds growing upon the streets, sidewalks, or private property in the city. (b) All rubbish, refuse, and dirt upon parkways, sidewalks, or private property in the city.

The city must then provide notice to the property owner, and the legislative body must conduct a hearing at which the property owner can object to the proposed abatement. IF: No objection is made, or objections are overruled; THEN: The legislative body may order the city’s street superintendent, by motion or resolution, to abate the nuisance, keeping track of the cost of abatement for each separate parcel of land. See Government Code §§ 39564-39574.

Once the legislative body has confirmed the superintendent’s report of the cost of abatement (see Government Code § 39576), a copy of the report is provided to the tax assessor and the cost of abatement is added to the next tax bill for the property from which weeds, rubbish, etc., were removed (see Section 39578).

In addition, a lien for the cost of abatement attaches to the property, as stated in Government Code § 39577:

The cost of abatement in front of or upon each parcel of land and the costs incurred by the responsible agency in enforcing abatement upon the parcels, including investigation, boundary determination, measurement, clerical and other related costs, constitutes a special assessment against that parcel.

After the assessment is made and confirmed, a lien attaches on the parcel upon recordation of the order confirming the assessment in the office of the county recorder of the county in which the property is situated, except that [i] if any real property to which such lien would attach has been transferred or conveyed to a bona fide purchaser for value, or [ii] if a lien of a bona fide encumbrancer for value has been created and attaches thereon, prior to the date on which the first installment of such taxes as imposed by Section 39578 would become delinquent, then [iii] the lien which would otherwise be imposed by this section shall not attach to such real property and the costs of abatement and the costs of enforcing abatement, as confirmed, relating to such property shall be transferred to the unsecured roll for collection. [Extra paragraphing, underlining, and bracketed numbering added.]

Perfection of the Lien:

The lien is perfected at the time it attaches, that is, at the time it is recorded in the office of the county recorded — see Government Code § 39577.

Priority of the Lien:

Under Government Code § 39577, the lien is junior in priority to (i) the interest in the property of a bona fide purchaser for value, and (ii) to a lien of a bona fide encumbrancer for value that was created and attached before the date on which the first installment of the added tax bill (see Section 39578) would become delinquent.

The Obligations Secured by the Lien:

See the discussion above.

The Collateral Subject to the Lien:

The lien applies to the parcel of land from which weeds, rubbish, etc., are removed — see Government Code § 39577.

The Classes of Secured Party/Debtor Subject to the Lien:

See the discussion above.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A party conducting due diligence can check the records in the county recorder’s office for a notice of this lien.

b. Liens for fees for waste disposal services under Government Code Section 2583 1(d).

[TO BE ADDED IN SUBSEQUENT DRAFT]

c. Liens for removal of dirt, rubbish, weeds, etc. under Government Code Section 39501.

[TO BE ADDED IN SUBSEQUENT DRAFT]

d. Lien for removal of obstructions or noxious materials under Government Code Section 39502.

[TO BE ADDED IN SUBSEQUENT DRAFT]

e. Lien for abatement of nuisances under Government Code Section 38773.

[TO BE ADDED IN SUBSEQUENT DRAFT]

f. Lien for furnishing utility services under Pub. Res. Code Section 5003.7. 44

How the Lien Arises/Attaches:

The lien under Cal. Pub. Res. Code § 5003.7 for state utility services applies where the Department of Parks and Recreation or the Department of General Services is not paid for water, sewage, gas, electricity, garbage, or other utility services provided to real property owners. In order to effect the lien, a notice of lien must be recorded in the county where the real property is located.

Perfection of the Lien:

The lien encumbers real property and follows the general rule for real property liens in that it is perfected by recording a notice of lien in the county where the real property is located. California Public Resources Code § 5003.7(a).

Priority of the Lien:

The lien follows the general rule for real property liens in that it takes priority from the date of recordation of the notice of lien. California Public Resources Code § 5003.7(e).

Civil Code § 2897 generally provides that, all other things being equal, different liens on the same property have priority according to the time of their creation. The statute creating this lien, California Public Resources Code § 5003.7, does not provide for any different priorities and in fact expressly states that priority dates from the date of recordation of the lien.

The Obligations Secured by the Lien:

The lien created under California Public Resources Code § 5003.7 secures water, sewage, gas, electricity, garbage, or other utility services provided to real property owners by the Department of Parks and Recreation or the Department of General Services to real property. The lien extends to delinquent charges for 4 years prior to the filing of the notice of lien.

The Collateral Subject to the Lien:

The lien created under California Public Resources Code § 5003.7 applies to the real property to which the water, sewage, gas, electricity, garbage, or other utility services is provided.

The Classes of Secured Party/Debtor Subject to the Lien:

Debtors and secured parties with an interest in the real estate are subject to the lien arising under California Public Resources Code § 5003.7. The lien takes priority from the time of filing so it does not affect the priority of prior recorded liens.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured party can protect itself against this lien by taking the usual actions it takes to protect itself against any other real estate lien that takes priority from the date of recordation: (a) performing a title search and obtaining title insurance for its deed of trust and (b) requiring its borrower to represent and warrant that there are no unpaid obligations owing with respect to the property that might result in a lien.

Miscellaneous:

The lien created under California Public Resources Code § 5003.7 does not appear to be cited in any published cases or referred to in any other California statutes.

g. Lien for Charges for Light, Water and Other Utilities under Pub. Util. Code Section 16470.

[TO BE ADDED IN SUBSEQUENT DRAFT]

h. Lien for Corrective Actions with Respect to Timber Harvesting under Pub. Res. Code Section 4608.

[TO BE ADDED IN SUBSEQUENT DRAFT]

i. Lien for Abatement of Nuisance by Pest Abatement Districts under Health & Safety Code Section 2864.

[TO BE ADDED IN SUBSEQUENT DRAFT]

j. Lien for Unpaid Hazardous Waste Abatement under Health & Safety Code Section 14912.

[TO BE ADDED IN SUBSEQUENT DRAFT]

k. Unpaid Charges for Services Rendered upon Leased Sanitation Facilities under Health & Safety Code Section 5061.

[TO BE ADDED IN SUBSEQUENT DRAFT]

l. Lien for Connection of Dwelling to Sewer under Health & Safety Code Sections 5463 and 5464.

[TO BE ADDED IN SUBSEQUENT DRAFT]

m. Liens for Fees for Waste Disposal Services under Government Code Sections 1191-1192.

[TO BE ADDED IN SUBSEQUENT DRAFT]

n. Lien for Mosquito Abatement under Health & Safety Code Section 2284.

[TO BE ADDED IN SUBSEQUENT DRAFT]

o. Lien for Abatement of Controlled Substances under Health & Safety Code Section 42406.

[TO BE ADDED IN SUBSEQUENT DRAFT]

p. Lien for Radiation Contamination under Health & Safety Code Section 115205.

[TO BE ADDED IN SUBSEQUENT DRAFT]

q. Lien for Rodent Abatement under Health & Safety Code Section 116155.

[TO BE ADDED IN SUBSEQUENT DRAFT]

r. Lien for Forest Fire Hazards under Pub. Res. Code Section 4477.

[TO BE ADDED IN SUBSEQUENT DRAFT]

s. Charges Assessed by Water Districts under Water Code Section 46280.

[TO BE ADDED IN SUBSEQUENT DRAFT]

t. Delinquent Water Service Standby and Availability Charges under Water Code Section 155501.1.

[TO BE ADDED IN SUBSEQUENT DRAFT]

u. Lien for Fine for Contempt when Building used for Prostitution in Violation of Abatement Order under Penal Code Section 11233.

[TO BE ADDED IN SUBSEQUENT DRAFT]

v. Liens for Taxes Levied by Municipal Utility District under Pub. Util. Code Section 12904.

[TO BE ADDED IN SUBSEQUENT DRAFT]

11. Health Facility Related Liens.

a. Lien for Local Hospital District Taxes under Health & Safety Code Section 32204.

[TO BE ADDED IN SUBSEQUENT DRAFT]

b. Lien for Health Facility Receiver Expenses under Health & Safety Code.

[TO BE ADDED IN SUBSEQUENT DRAFT]

12. Other Liens.

a. Lien for penalties for polluting vessels under Health & Safety Code Section 42406.

[TO BE ADDED IN SUBSEQUENT DRAFT]

b. Lien for plaintiffs’ costs in abatement action to enjoin operation of gambling ship under Penal Code Section 11310.

[TO BE ADDED IN SUBSEQUENT DRAFT]

c. Lien for navigation penalties under Harb. & Nav. Code Section 266.

[TO BE ADDED IN SUBSEQUENT DRAFT]

d. Salvage lien under Harb. & Nav. Code Section 534.

[TO BE ADDED IN SUBSEQUENT DRAFT]

e. Lien for penalties for polluting vessel under Health & Safety Code Section 42406.

[TO BE ADDED IN SUBSEQUENT DRAFT]

f. Lien for oil and gas conservation under Pub. Res. Code Sections 3226 and 3680.

[TO BE ADDED IN SUBSEQUENT DRAFT]

g. Vehicle license fee under Rev. & Tax. Code Section 10876.

[TO BE ADDED IN SUBSEQUENT DRAFT]

h. Liens for taxes levied by the Bay Area Air Quality, Management District under Health & Safety Code Section 40273.

[TO BE ADDED IN SUBSEQUENT DRAFT]

i. Lien for taxes and charges on gas production under Pub. Res. Code Section 3423.

[TO BE ADDED IN SUBSEQUENT DRAFT]

j. Taxes levied by airport districts under Pub. Util. Code Section 22908.

[TO BE ADDED IN SUBSEQUENT DRAFT]

k. Taxes levied by San Francisco Bay Area Transit District under Pub. Util. Code Section 29131.

[TO BE ADDED IN SUBSEQUENT DRAFT]

l. Taxes levied by the Santa Cruz Metropolitan Transit District under Pub. Util. Code Section 98289.3.

[TO BE ADDED IN SUBSEQUENT DRAFT]

m. Unpaid tax for vehicle fuel license taxes under Rev. & Tax. Code Section 6757.

[TO BE ADDED IN SUBSEQUENT DRAFT]

n. Use fuel excise tax under Rev. & Tax. Code Sections 8991-8997.

[TO BE ADDED IN SUBSEQUENT DRAFT]

o. Taxes on insurers under Rev. & Tax. Code Sections 12491-12495.

[TO BE ADDED IN SUBSEQUENT DRAFT]

p. Unpaid cigarette taxes under Rev. & Tax. Code Section 30322.

[TO BE ADDED IN SUBSEQUENT DRAFT]

q. Unpaid alcoholic beverage tax under Rev. & Tax. Code Section 32363.

[TO BE ADDED IN SUBSEQUENT DRAFT]

r. Unpaid timber yield taxes under Rev. & Tax. Code Section 38523.

[TO BE ADDED IN SUBSEQUENT DRAFT]

s. Special assessments for street and highway improvements under St
s. & High. Code Section 3115.

[TO BE ADDED IN SUBSEQUENT DRAFT]

t. Street improvements under 1911 Street Improvement Act under Sts. & High. Code Section 5373.

[TO BE ADDED IN SUBSEQUENT DRAFT]

u. Special assessments for sidewalks and curb improvements under Sts. & High. Code Section 5890.

[TO BE ADDED IN SUBSEQUENT DRAFT]

v. Special assessments for city street lighting under Sts. & High. Code Section 18403.

[TO BE ADDED IN SUBSEQUENT DRAFT]

w. Taxes levied by highway lighting districts under Sts. & High. Code Section 19184.

[TO BE ADDED IN SUBSEQUENT DRAFT]

x. Special assessment for tree planting under Sts. & High. Code Section 27205.

[TO BE ADDED IN SUBSEQUENT DRAFT]

y. Taxes for benefit of bridge and highway districts under Sts. & High. Code Section 27169.

[TO BE ADDED IN SUBSEQUENT DRAFT]

z. Lien for vehicle fees, taxes and penalties under Veh. Code Section 9800.

[TO BE ADDED IN SUBSEQUENT DRAFT]

aa. Storage of vehicle which has been towed under Veh. Code Section 22851.

[TO BE ADDED IN SUBSEQUENT DRAFT]

bb. Unpaid toll fees under Veh. Code Section 23303.

[TO BE ADDED IN SUBSEQUENT DRAFT]

cc. Lien for payments due under Medi-Cal Program under Welf. & Inst. Code Sections 14124.74-.75.

[TO BE ADDED IN SUBSEQUENT DRAFT]

dd. Lien for the overpayment by state to healthcare providers under Welf. & Inst. Code Section 14173.

[TO BE ADDED IN SUBSEQUENT DRAFT]

ee. Unpaid gift taxes under Rev. & Tax. Code Section 16063.

[TO BE ADDED IN SUBSEQUENT DRAFT]

ff. Unpaid personal income taxes under Rev. & Tax. Code Section 18881.

[TO BE ADDED IN SUBSEQUENT DRAFT]

gg. Hazardous substances taxes under Rev. & Tax. Code Section 43413.

[TO BE ADDED IN SUBSEQUENT DRAFT]

hh. Highway use taxes under Veh. Code Section 8162.

[TO BE ADDED IN SUBSEQUENT DRAFT]

ii. Unpaid water charges under Water Code Section 36729.

[TO BE ADDED IN SUBSEQUENT DRAFT]

jj. Liens of federal government obtained by title vesting. See Manne Midland Bank v. United States, 687 F. 2d 395, 397, 404 (Ct. Cl. 1982), cert. den. 460 U.S. 1037 (1982).

[TO BE ADDED IN SUBSEQUENT DRAFT]

II-F. Liens on Particular Types of Personal Property Collateral – Hidden Liens Report

1. Maritime liens under Title 46 of the United States Code.

[TO BE ADDED IN SUBSEQUENT DRAFT]

2. Issuer’s lien under Commercial Code Section 8209.

[TO BE ADDED IN SUBSEQUENT DRAFT]

3. Oil and gas liens under Code of Civil Procedure Sections 1203.52-.66.

[TO BE ADDED IN SUBSEQUENT DRAFT]

4. Aircraft lien law under Code of Civil Procedure Section 1208.

[TO BE ADDED IN SUBSEQUENT DRAFT]

5. Credit union’s lien on member’s shares under Fin. Code Section 14856.

[TO BE ADDED IN SUBSEQUENT DRAFT]

6. Lien of conservator of escrow agent under Fin. Code Section 17631.

[TO BE ADDED IN SUBSEQUENT DRAFT]

7. Lien on tax receipts for money borrowed by county, city, municipal corporation, etc. under Government Code Section 53829.

[TO BE ADDED IN SUBSEQUENT DRAFT]

8. Bottomry under Harb. & Nav. Code Sections 450-462.

[TO BE ADDED IN SUBSEQUENT DRAFT]

9. Actions against vessels under Harb. & Nav. Code Sections 490-495.

[TO BE ADDED IN SUBSEQUENT DRAFT]

10. Service lien on vessels under Harb. & Nav. Code Section 501.

[TO BE ADDED IN SUBSEQUENT DRAFT]

11. Lien for expenses of heirs with undivided interests in property under Prob. Code Section 11955.

[TO BE ADDED IN SUBSEQUENT DRAFT]

Endnotes

1 Therefore, this report does not discuss liens arising under Revised Articles 8 or 9 of the Commercial Code, liens on real property, aircraft and copyrights (except as specifically set forth herein). Back

2 This report will be updated periodically to include discussions of those identified liens not analyzed in this draft, as well as other liens that members of the Committee may identify in the future. Back

3 This analysis last updated on 12/1/2010. Back

4 Section 2401(1) of the Commercial Code provides as follows:

  1. Title to goods cannot pass under a contract for sale prior to their identification to the contract (Section 2501), and unless otherwise explicitly agreed the buyer acquires by their identification a special property as limited by this code. Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions of the division on secured transactions (Division 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties. Back

5 Section 2502 of the Commercial Code provides as follows:

  1. Subject to subdivision (2) and, in pertinent part, (3), and even though the goods have not been shipped, a buyer who has paid a part or all of the price of goods in which he or she has a special property under…[section 2501] may on making and keeping good a tender of any unpaid portion of their price recover them from the seller if either: (a) In the case of goods bought for personal, family or household purposes, if seller repudiates or fails to deliver as required by the contract, or (b) In all cases, the seller becomes insolvent within 10 days after receipt of the first installment on their price.
  2. The buyer’s right to recover the goods under paragraph (a) of subdivision (1) vests upon acquisition of a special property, even if the seller had not then repudiated or failed to deliver.
  3. If the identification creating his special property interest has been made by the buyer, he or she acquires the right to recover the goods only if they conform to the contract for sale. Back

6 See also the priority rules that apply to Commercial Code § 2702, a complementary section that establishes sellers’ reclamation rights where an insolvent buyer has received goods on credit. Back

7 See also the priority rules that apply to Commercial Code § 2702, a complementary section that establishes sellers’ reclamation rights where an insolvent buyer has received goods on credit. Back

8 This analysis last updated on 5/1/2008. Back

9 This analysis last updated on 5/1/2008. Back

10 This analysis last updated on 5/1/2008. Back

11 This analysis last updated on 5/1/2008. Back

12 This analysis last updated on 5/1/2008. Back

13 This analysis last updated on 5/1/2008. Back

14 This analysis last updated on 5/1/2008 Back

15 This analysis last updated on 12/1/2010. Back

16 A bill of lading is a document issued by a carrier when goods are received for transport. A bill of lading functions as a receipt, document of title, and contract for transport. Commercial Code § 1201(6) defines a “bill of lading” to mean a “document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods.” Back

17 The Commercial Code does not define what goods a carrier is “required by law” to receive for transportation. The California Civil Code defines a “common carrier” as “one who offers to the public to carry … property …” Cal. Civ. Code § 2168. A common carrier is obligated to “accept and carry whatever is offered to him … of a kind that he undertakes or is accustomed to carry.” Cal. Civ. Code § 2169. Further, “[a] common carrier is entitled to reasonable compensation … in advance. If payment thereof is refused, he may refuse to carry.” Cal. Civ. Code § 2173. Back

18 “Consignor” is defined to mean “the person named in a bill as the person from whom the goods have been received for shipment.” Commercial Code § 7102(a)(4). Back

19 Secured creditors of the consignor would appear to fall under this category vis-à;-vis Commercial Code § 9609. Back

20 This analysis last updated on 12/1/2010. Back

21 A carrier has a lien for (a) freightage and for services rendered at request of shipper or consignee in and about the transportation of the property, (b) care and preservation of the property, (c) money advanced at request of shipper or consignee to discharge a prior lien, and (d) subject to the limitations specified in section 3051.6, any fines, penalties, costs, expenses, and interest arising from the provision of false or erroneous certifications of gross cargo weight as required by section 508 of Title 49 of the United States Code. The carrier’s rights to this lien are regulated by the title on liens. Back

22 This analysis last updated on 12/1/2010. Back

23 This analysis last updated on 12/1/2010. Back

24 This analysis last updated on 12/1/2010. Back

25 This analysis last updated on 12/1/2010. Back

26 This analysis last updated on 12/1/2010. Back

27 This analysis last updated on 12/1/2010. Back

28 This analysis last updated on 12/1/2010. Back

29 This analysis last updated 5/1/2008. Back

30 This analysis last updated on 5/1/2008 Back

31 This analysis last updated 5/1/2008. Back

32 This analysis last updated on 5/1/2008. Back


33 This analysis last updated on 12/1/2010. Back

34 This analysis last updated on 12/1/2010. Back

35 7 U.S.C. § 196 applies to livestock packers and 7 U.S.C. § 197 applies to poultry dealers. Packers whose average annual purchases are less than $500,000 are exempt from this provision. Poultry dealers whose average annual purchases are less than $100,000 are exempt from this provision. Back

36 This analysis last updated on 12/1/2010. Back

37 This analysis last updated 5/1/2008. Back

38 This analysis last updated 12/1/2010. Back

39 This analysis last updated 12/1/2010. Back

40 This analysis last updated on 12/1/2010. Back

41 This analysis last updated on 5/1/2008. Back

42 This analysis last updated on 5/1/2008. Back

43 This analysis last updated on 12/1/2010. Back

44 This analysis last updated on 5/1/2008 Back

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