Imagine the following scenario: Customer stores goods with a warehouseman. While the goods are in the possession of the warehouseman, the customer goes out of business. The warehouseman, unpaid, attempts to sell the goods to pay its unpaid storage charges, but finds that the customer’s secured lender claims a superior interest in the goods by virtue of a security interest properly perfected before the goods were placed in the warehouseman’s possession. As discussed below, case law usually, but not always, finds that a warehouseman’s lien granted by the Uniform Commercial Code (UCC) is subordinate to the interest of a previously perfected secured creditor. Nonetheless, if our warehouseman finds its UCC lien subordinated, state statute or common law may provide an avenue to prime the secured creditor. Given the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005’s (BAPCPA’s) greatly enhanced protection of warehousemen’s liens, the priority of these liens is of utmost importance.¹

The Warehouseman’s UCC Lien

Under §7-209 of the UCC, a warehouseman has a lien against the bailor on the goods in the warehouseman’s possession for unpaid storage and transportation charges. At bare minimum, this lien is a “specific” lien attaching to the goods held by the warehouseman, but depending on the wording of the receipt or storage agreement, it can expand to a “general” lien covering “like charges in relation to other goods.”² Thus, our warehouseman finds itself in the enviable position of having a lien on the goods to help defray the unpaid storage charges. However, the lien is possessory, and the warehouseman loses his lien on any goods he voluntarily delivers. UCC §7-209(e). Likewise, an unjustifiable refusal to deliver the goods may result in loss of the lien. Id.

But what is the priority of the warehouseman’s lien in relation to the secured lender’s lien? Under §9-333 of Revised Article 9³ (RA9), the warehouseman’s lien, being possessory, has “priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” In other words, RA9 provides that if the possessory lien derives from common law, or derives from a statute that is silent as to the lien’s subordination to existing security interests, then the possessory lien has priority over a previously perfected security interest.⁴

In our scenario, our warehouseman has asserted a lien under the UCC, so the lien derives from statute. But §7-209(c) of the UCC has the “provides otherwise” language, which may trigger subordination of the warehouse lien since a lien is only “effective against any person that so entrusted the bailor with possession of the goods that a pledge of them by the bailor to a good-faith purchaser for value would have been valid.” UCC §7-209(c). Thus, our warehouseman’s lien is not effective as against the secured party unless the circumstances surrounding deposit of the goods to the warehouseman was such that “a pledge by the [customer] to a good-faith purchaser for value would have been valid.”⁵ Likewise, our warehouseman’s lien is not effective against a security interest held by the secured lender unless the secured lender so entrusted the customer with possession of the goods that a pledge of the goods by the customer would have given a “hypothetical bona fide pledgee” priority over the secured lender. Official Comment 3 to UCC §7-209.

Cases Finding Warehouseman’s UCC Lien Subordinated to Prior Perfected Security Interest

K Furniture Co. v. Sanders Transfer & Storage Co., 532 S.W.2d 910 (Tenn. 1975), nicely illustrates the use of the hypothetical “good-faith purchaser” or “bona fide pledgee” doctrines to subordinate a warehouseman’s lien to that of a previously perfected secured lender. In this case, a consumer purchased household furniture on credit, granting the seller a valid purchase money security interest (PMSI). The furniture was then placed in storage by the customer’s wife. The customer defaulted on the payment, and the secured lender sought to recover the furniture. The warehouse asserted its lien rights under §7-209 of the UCC. In holding for the secured lender, the K Furniture court noted that there was nothing in the record to indicate that the secured lender had “delivered or entrusted the furniture to [the customer’s wife] with the actual or apparent authority to store the furniture....”⁶ As such, the security interest of the secured lender took priority over the warehouseman’s lien. Notably, the court makes no mention of whether its holding would have been impacted if the customer, as opposed to his wife, placed the furniture in storage.⁷

In re Siena Publishers Associates, 149 B.R. 359 (Bankr. S.D.N.Y. 1993), reached a similar conclusion. In this case, the debtor, a book wholesaler, outsourced its order fulfillment and warehousing services to MSI. The debtor’s assets were sold in bankruptcy, with any liens to attach to proceeds of the sale. The debtor’s secured lender perfected its security interest in the debtor’s assets prior to MSI’s warehouse lien. The court found that though MSI retained possession of the inventory, its warehouse lien was subordinated to the bank’s security interest because “the debtor could not validly pledge its inventory to a bona fide pledgee for value because the bank possessed a validly perfected security interest in all of the debtor’s assets, including its inventory.” In re Siena Publishers, 149 B.R. at 364.⁸

Cases Finding Warehouseman’s UCC Lien Not Subordinated to Prior Perfected Security Interest

In re Sharon Steel Corp., 176 B.R. 384 (Bankr. W.D. Pa. 1995), presents a bankruptcy court determining that a security interest held by a secured lender in certain of the debtor’s inventory was subordinate to later arising liens in the same inventory held by multiple warehousing companies. In analyzing the priority of the warehouseman’s liens against the secured lender’s security interest, the Sharon court agreed that “[w]here the third party is the holder of a security interest, the rights of the warehousemen depend on the priority given to a hypothetical bona fide pledgee....” Sharon Steel Corp., 176 B.R. at 387-88.

However, the Sharon court found for the warehousemen. Importantly, the court noted that “under the loan documentation, the debtor was permitted to incur warehouseman’s...liens in the ordinary course of business, and that such liens were ‘permitted liens’ under the security agreement.” See Id. at 388. The court then noted:

By permitting the debtor to store inventory [with the warehouse-men] and permitting the debtor to incur warehouseman’s...liens in the ordinary course of business, [the secured lender] effectively permitted the debtor to transfer its inventory to the pledgees [the warehousemen] as security for the [debtor’s] payment of the warehouseman’s...liens.

Accordingly, the court held that the prior perfected security interest of the secured lender was subordinate to the liens held by the warehousemen. Thus, our warehouseman would be advised to analyze the security agreement and other loan documents between the secured lender and the customer to determine if these documents create an argument that the secured lender has clothed the customer with sufficient authority to meet the hypothetical “good-faith purchaser” or “bona fide pledgee” requirements.

A Prior Perfected Security Interest May Be Subordinate to Possessory Storage Liens Under State Statute and/or Common Law

As shown, the party claiming a UCC warehouse lien may find itself with a valid lien claim, but one that is subordinated to a previously perfected security interest. However, even though the UCC lien may be subordinated to that of the secured lender, a common-law possessory lien would not be subordinate. Recall that under RA9-333, a possessory lien has “priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” Common-law liens, not being based on statute, would not trigger subordination under RA9-333. Likewise, a non-UCC possessory storage lien created by a statute that did not expressly provide for subordination to a security interest should likewise defeat subordination.

Use of common-law principles by a warehouseman to prime a secured lender is shown by the recent case of Charter One Auto Finance v. Inkas Coffee Distributors Realty, 57 UCC Rep.Serv.2d 672, 39 Conn. L. Rptr. 110 (Conn. Super. Ct. 2005). In this case, the secured lender held a PMSI in an automobile. The automobile’s owner stored the vehicle in a parking lot located in the state of Connecticut. The customer defaulted on its loan obligations, and the secured lender demanded possession of the automobile from the parking lot. The parking lot refused to release the vehicle until its storage fees were paid. The secured lender sued the parking lot in replevin. The parking lot counterclaimed, arguing that its common-law and statutory-lien rights (including a §7-209 lien) were superior to the secured lender’s claim.

In ruling for the parking lot, the court noted that Connecticut law recognized a common-law possessory lien for storage.⁹ As such,

This possessory lien is not premised on a statute; accordingly, the “unless” part of §9-310’s [RA9-333] rule is inapplicable. Also, the court is unaware of a statute which expressly provides that a perfected security interest has priority over such a common law possessory lien....

Since the parking lot prevailed on its common-law lien, the court did not address the portions of the counterclaim brought under UCC §7-209. See, also, Nat’l. Bank of Joliet v. Bergeron Cadillac Inc., 66 Ill.2d 140, 143 (Ill. 1977) (stating that the “the artisan’s possessory lien of the common law is recognized in Illinois” and that since the artisan’s lien is nonstatutory, the statutory subordination provision in §9-310 [RA9-333] is not applicable).

Conclusion

The situation presented to our warehouseman is not unlike that presented to a reclamation creditor whose recovery on an otherwise valid claim is trumped by a secured creditor with a previously perfected security interest. Our warehouseman’s odds of priming the secured lender are improved by a showing that the secured lender consented, by loan agreement or perhaps otherwise, to the customer’s placement of the goods in storage, since such showing goes to the hypothetical “good-faith purchaser” or “bona fide pledgee” requirements of §7-209. Our warehouseman may also argue that state common law or statute gives it an additional possessory storage lien not subordinated under RA9-933. n

 

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Footnotes

1 11 U.S.C. §546(i) (stating that “the trustee may not avoid a warehousemen’s lien”).
2 See Official Comment 1 to Model Version of UCC §7-209.
3 Formerly UCC §9-310.
4 See Official Comment 2 to Model Version of UCC §9-333.
5 Official Comment 3 to UCC §7-209. Factors to consider include the “actual, implied or apparent authority of the depositor.” Reference is also made to UCC §§7-503 and 9-322 of RA9.
6 K Furniture Co., 532 S.W.2d at 912.
7 The model version of UCC §7-209 has a subsection (d) providing that a warehouseman’s lien on “household goods” is effective “against all persons.” Thus, under this provision, a warehouseman’s lien on household goods should defeat a previously perfected secured creditor. Not all jurisdictions have adopted this provision, though.
8 The Supreme Court of Idaho reached a similar decision in Curry Grain Storage Inc. v. Heston Corp., 815 P.2d 1068, 1071 (Idaho 1991), in which the lien of warehouseman holding seed for a customer was subordinated to that of the customer’s secured lender since the secured lender had not “so entrusted [customer] with possession of the seed that a pledge of the seed by [customer] to a good-faith purchaser for value would have been valid.” After that decision, the Idaho legislature enacted a parallel provision to 7-209, Idaho Code §28-7-209A, which allowed warehouseman liens for “agricultural commodities” to have priority over a previously perfected security interest. See AG Services of America Inc. v. Kechter, 44 P.2d 1117, 1121-22 (Idaho 2002). However, §28-7-209A of the Idaho Code was recently repealed.
9 Not all states recognize a common-law possessory lien for storage. See, e.g., Jewett v. City Transfer & Storage Co., 18 P.2d 351 (Cal. Dist. Ct. App. 1933) (stating at common law, warehouseman had specific lien for proper storage charges); Pennsylvania Indus. Finance Ass’n. v. Thomas, 18 Pa. D. & C. 367 (Pa. Com. Pl. 1933) (warehouseman has common-law right of lien for storage charges on goods in his possession); Reebie v. Brackett, 109 Ill. App. 631 (Ill. App. Ct. 1903) (warehousemen at common law had lien upon goods for services performed in relation to them). But, for a contrary view, see Mack Motor Truck Corp. v. Wolfe, 303 S.W.2d 697 (Mo. Ct. App. 1957) (stating that no lien for storage exists at common law.); Minnehoma Financial Co. v. Pauli, 565 P.2d 835 (Wyo. 1977) (stating there was no common-law lien for storage, and therefore, such a lien can only be acquired by statute); Fitzhugh v. City of Douglas, 596 P.2d 737 (Ariz. Ct. App. 1979) (stating that right to a lien for storage costs is strictly statutory, and such a right did not exist at common law); Williams v. International Co., 141 P.2d 837 (Or. 1943), overruled on other grounds, Rogue Val. Mem. Hosp. v. Salem Ins., 510 P.2d 845 (Or. 1973) (stating there is no common-law lien right for recovery of costs for storage of vehicles). Further, even though a state may have at one time recognized a common-law lien, such common-law rights can be abrogated by later statute.