Bellamy's, Inc. v. Genoa National Bank ( 2007 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 06-6062 NE
In re: *
*
Michael R. Borden and *
Rhonda F. Borden, *
*
Debtors. *
*
Bellamy’s Inc., * Appeal from the United States
* Bankruptcy Court for the
Creditor - Appellant, * District of Nebraska
*
v. *
*
Genoa National Bank, *
*
Creditor - Appellee, *
Submitted: February 9, 2007
Filed: March 9, 2007
Before KRESSEL, Chief Judge, SCHERMER, and VENTERS, Bankruptcy Judges
SCHERMER, Bankruptcy Judge
Bellamy’s Inc. (“Artisan”) appeals the bankruptcy court’s order determining
that the lien of Genoa National Bank (“Lender”) in certain farm equipment owned by
Michael R. Borden (“Debtor”) takes priority over the Artisan’s lien in the same
equipment. We have jurisdiction over this appeal from the final order of the
bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we
reverse.
ISSUE
This case involves a priority dispute between two lienholders: the Lender who
asserts a first priority blanket lien on all of the personal property of the Debtor and his
wife, and the Artisan who asserts an artisan’s lien on certain equipment by virtue of
repairs to the equipment. After filing bankruptcy, the Debtor took the equipment from
the Artisan without authority, used it in his farming operations, and later returned the
equipment to the Artisan’s possession. The question on appeal is whether the Artisan
has a lien which takes priority over the Lender’s lien. In order to answer this question,
we must determine if the Artisan lost its lien when the Debtor removed the equipment
from the Artisan’s possession and what impact, if any, the Debtor’s post-petition
return of the equipment to the Artisan had on its lien. We conclude that the Artisan
did not lose its lien when the Debtor took the equipment from its possession, that the
Debtor’s return of the equipment was not necessary for the Artisan to have a lien, and
that the Artisan’s lien has priority over the Lender’s blanket lien.
BACKGROUND
On June 25, 2002, the Debtor and his wife granted the Lender a blanket security
interest on all of their personal property, including machinery and equipment then
owned and thereafter acquired. The Lender perfected its security interest by filing a
UCC financing statement with the Nebraska Secretary of State on June 26, 2002.
On separate occasions in late 2004, the Debtor took a certain cornhead and a
certain tractor (collectively the “Equipment”) to the Artisan for repairs. The Artisan
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performed the repairs and in February 2005 sent the Debtor a bill in the amount of
$3,811.46 for the work performed on the cornhead and in March 2005 sent a bill in
the amount of $1,281.34 for the work performed on the tractor. The Debtor did not
have the money to pay for the repairs and the Artisan refused to release the Equipment
to the Debtor without payment, so the Equipment remained in the Artisan’s
possession.
On April 1, 2005 (“Petition Date”), the Debtor and his wife filed a joint
voluntary petition for relief under Chapter 12 of the Bankruptcy Code. The
Equipment was in the Artisan’s possession on the Petition Date. In June 2005, the
Debtor took the tractor from the Artisan’s lot without permission, drove it to his farm,
and used it in connection with his farming operations. The Artisan discovered the
tractor was missing and contacted the Debtor to inquire if he had it in his possession.
The Debtor admitted that he had taken the tractor, explained that he needed it for his
farming operations, and agreed to return it to the Artisan as soon as he was finished
using it. The tractor broke down while the Debtor was using it. Nevertheless, the
Debtor returned the tractor to the Artisan in the fall of 2005.
In September 2005, the Debtor took the cornhead from the Artisan’s lot without
permission. The Artisan became aware that the cornhead was missing and contacted
the Debtor regarding its whereabouts. The Debtor admitted that he had taken the
cornhead, explained that he was using it to harvest corn, and agreed to return it as
soon as he completed harvesting the crop. The Debtor returned the cornhead to the
Artisan in November 2005.
In April 2006, the Lender filed a motion to determine the priority of the
respective liens asserted by the Lender and the Artisan in the Equipment. The
bankruptcy court determined that no controlling law existed in Nebraska governing
the situation of competing liens where an artisan loses possession of the personal
property through action of the property owner. The bankruptcy court looked to other
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jurisdictions for guidance and found that other courts faced with the issue had reached
conflicting results. The bankruptcy court decided that the Lender’s lien had priority
over the lien asserted by the Artisan. In reaching its decision, the bankruptcy court
concluded that continuous possession is required to maintain an artisan’s lien.
Alternatively, the bankruptcy court held that even if continuous possession is not
required, the automatic stay prevented the Artisan from regaining possession of the
Equipment post-petition. Therefore the Artisan could not have had a possessory
artisan’s lien. The Artisan filed a motion to reconsider which was denied by the
bankruptcy court. The Artisan appealed.
STANDARD OF REVIEW
The facts are not in dispute. We review the bankruptcy court’s conclusions of
law de novo. Dapec, Inc. v. Small Bus. Admin., U.S. (In re MBA Poultry, L.L.C.), 291
F.3d 528, 533 (8th Cir. 2002).
DISCUSSION
Nebraska law provides a lien to any person who repairs a vehicle, machinery,
or a farm implement while in such person’s possession for the reasonable or agreed
charges for the work done or materials furnished on or to such vehicle, machinery, or
farm implement and authorizes the artisan to retain possession of the property until
the charges are paid. Neb. Rev. Stat. § 52-201. Such a lien is referred to as an
artisan’s lien. Nebraska law also recognizes a possessory lien as an interest, other
than a security interest or an agricultural lien, which secures payment or performance
of an obligation for services or materials furnished with respect to goods by a person
in the ordinary course of such person’s business which is created by statute or rule in
favor of the person and whose effectiveness depends on the person’s possession of the
goods. Neb. Rev. Stat. U.C.C. § 9-333(a). An artisan’s lien falls within this definition
of possessory lien under Nebraska law. A possessory lien on goods, such as an
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artisan’s lien, has priority over a security interest in the goods unless the possessory
lien is created by a statute that expressly provides otherwise. Neb. Rev. Stat. U.C.C.
§ 9-333(b). The artisan’s lien statute does not provide otherwise; accordingly, an
artisan’s lien has priority over a previously perfected security interest in the same
goods.
In order to determine the respective rights of the Lender and the Artisan in the
Equipment, we must determine if the Artisan has an artisan’s lien in the Equipment
under Nebraska law. If the Artisan does, its lien has priority over the Lender’s
security interest in the Equipment. In making this determination, we must answer the
difficult question of whether the Artisan has a possessory lien where it involuntarily
lost and later regained possession of the Equipment without court authority following
the Debtor’s bankruptcy filing. The statute is silent on this situation and no Nebraska
court has addressed this situation other than the trial court below.
Courts from other jurisdictions have addressed various situations where artisans
have lost possession of the personal property to which they provided services yet
asserted a lien thereon either without possession or after regaining possession. Some
general rules can be gleaned from the case law. First, possession is generally required
for a possessory lien. Mack Fin. Corp. v. Peterbilt of Chattanooga, Inc. (In re Glenn),
20 B.R. 98, 99-100 (Bankr. E.D. Tenn. 1982); Gen. Motors Acceptance Corp. v.
Colwell Diesel Serv. & Garage, Inc., 302 A.2d 595, 597 (Me. 1973); Yellow Mfg.
Acceptance Corp. v. Bristol, 236 P.2d 939, 946 (Or. 1951). If an artisan surrenders
possession, the artisan no longer has a possessory lien with priority over pre-existing
security interests. Yellow Mfg. Acceptance Corp. v. Bristol, 236 P.2d at 946. Some
courts recognize a continuing lien as between the artisan and the owner after return
of possession to the owner; however, such lien lacks priority over pre-existing security
interests. Forrest Cate Ford, Inc. v. Fryar, 465 S.W.2d 882, 883-84 (Tenn. Ct. App.
1971); Yellow Mfg. Acceptance Corp. v. Bristol, 236 P.2d at 946-47. Other courts
relegate the lien to a state of suspended animation upon release of the goods to the
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owner; the artisan cannot enforce the lien while it is in a state of suspended animation.
Gordon v. Sullivan, 188 F.2d 980, 981-82 (D.C. Cir. 1951). In this situation, if the
artisan regains possession lawfully, the ability to enforce the artisan’s lien is once
again available to the artisan. Id. at 982.
Where the artisan loses possession involuntarily, the artisan does not
necessarily lose the artisan’s lien. Smith v. Cooper Chevrolet, Inc., 404 So. 2d 49, 51
(Ala. 1981); Finch v. Miller, 531 P.2d 892, 893 (Or. 1975)(en banc); Gen. Motors
Acceptance Corp. v. Colwell Diesel Serv. & Garage, Inc., 302 A.2d at 597; Yellow
Mfg. Acceptance Corp. v. Bristol, 236 P.2d at 947. Likewise, a conditional release of
goods does not necessarily defeat the artisan’s lien. Smith v. Cooper Chevrolet, Inc.,
404 So. 2d at 51. This result follows at least with respect to holders of prior security
interests who are not impaired by the conditional release. M & I W. State Bank v.
Wilson, 493 N.W.2d 387, 390 (Wis. Ct. App. 1992). Some courts hold that an
artisan’s lien lost when possession is lost is revived upon resumption of possession.
Such a lien retains its priority as before the release except that the lien is subordinate
to the interests of a bona fide purchaser or a creditor who attached or levied on the
property while it was in the possession of the owner. M & I W. State Bank v. Wilson,
493 N.W.2d at 390. The M & I Western State Bank v. Wilson court expressly held that
continuous or retained possession is not required. Id. at 392. See also Thorp
Commercial Corp. v. Mississippi Road Supply Co., 348 So. 2d 1016 (Miss. 1977),
holding that where there was no change in the status or rights of the parties between
the date personal property was delivered to the owner and the date it was returned to
the artisan, the prior lender was not prejudiced by the restoration of the artisan’s lien
which had priority over the pre-existing security interest.
We conclude that the Artisan did not lose its artisan’s lien in the Equipment
when the Debtor took the Equipment without the Artisan’s knowledge or consent.
Such involuntary loss of possession does not defeat the Artisan’s lien. Smith v.
Cooper Chevrolet, Inc., 404 So. 2d at 51; Finch v. Miller, 531 P.2d at 893; Gen.
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Motors Acceptance Corp. v. Colwell Diesel Serv. & Garage, Inc., 302 A.2d at 597;
Yellow Mfg. Acceptance Corp. v. Bristol, 236 P.2d at 947. Furthermore, even if the
Artisan’s failure to take action to regain possession of the Equipment can be deemed
consent to the Debtor’s prior wrongful taking of the Equipment, such after-the-fact
consent could not have been more than a conditional consent to the Debtor’s
temporary use of the Equipment with an agreement to return it to the Artisan. A
conditional consent to a prior wrongful taking likewise does not defeat the Artisan’s
lien. M & I W. State Bank v. Wilson, 493 N.W.2d at 390; Smith v. Cooper Chevrolet,
Inc., 404 So. 2d at 51.
This result is consistent with the policy underlying the creation and priority of
security interests. A lien or security interest must be perfected. The purpose of
perfection is to give the world notice of the lien or security interest. Notice is
generally accomplished in one of three ways: by registering the lien with an agency
(usually a local government entity or a secretary of state’s office), by noting the lien
on the title, or by possession. Third parties can learn of any liens or security interests
in any particular property by searching the records of the appropriate authority or by
viewing the title. If no lien or security interest is disclosed, the third party may rely
on the assumption that the property is owned free and clear of any liens if the property
is in the owner’s possession.
An artisan’s lien does not require registration with any entity. Therefore, in
order to give notice of the lien, the artisan is permitted to retain the property until
receiving payment for the services provided to the property. Upon payment the lien
is satisfied and the artisan releases the property. A third party interested in the
property can easily learn that the property is not in the owner’s possession and is then
put on inquiry notice to determine why the owner does not have possession of the
property. If the owner cannot produce the property, the third party has notice that
another entity, including an artisan, may assert an interest in such property. A third
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party who continues to deal with the property owner after learning the owner lacks
possession of the property does so at his or her peril.
With respect to competing holders of liens or security interests in the same
property, notice of the various liens and security interests allows each interested party
to know where he or she falls in the pecking order. With respect to recorded interests,
the general rule is that first in time has priority. However, artisan’s liens are not
recorded and invariably are created after security interests have been granted. Courts
and legislatures generally recognize that a party who provides labor and materials to
property enhances the value of the property. Therefore, the principles of natural
justice and commercial necessity dictate that the entity who enhances the value of
property should be entitled to payment for such services and may retain the property
until receipt of payment therefor. Gen. Motors Acceptance Corp. v. Colwell Diesel
Serv. & Garage, Inc., 302 A.2d at 596-97. Indeed, the Nebraska statute at issue in this
case provides exactly that. Artisan’s lien laws are to be liberally construed to
accomplish their equitable purpose of aiding materialmen and laborers to obtain
compensation for materials used and services bestowed upon property of another
which thereby enhances the value of such property. Wiedenbeck-Dobelin Co. v.
Mahoney, 152 N.W. 479, 481 (Wis. 1915).
A lender who advances funds to acquire certain property or who loans money
secured by existing property does so on the basis of the property at the time of the
loan. The lender generally assumes the owner will maintain the property after the loan
is made and often mandates such maintenance in the loan documentation. If the
property later breaks or is in need of maintenance, the owner takes the property to an
artisan for repair or maintenance. Such repair or maintenance enhances the value of
the property, thus enhancing the value of the lender’s collateral. The lender thus
benefits from the repair. This was the case with the Equipment. The Lender took the
security interest in the Equipment long before the Artisan performed the repairs to it.
Immediately prior to the repairs, the Equipment was not working properly and
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therefore its value was diminished. By performing the repairs, the Artisan enhanced
the value of the Equipment, thus benefitting the Lender by increasing the value of its
collateral. Recognizing the superiority of the Artisan’s lien over the Lender’s security
interest is consistent with the policy underlying artisan lien law.
The bankruptcy court was troubled by the lack of certainty where an artisan is
permitted to retain a lien without maintaining possession of the property. By requiring
continuous possession in order to maintain an artisan’s lien, the court limited
uncertainty. While certainty is a valid goal in statutory interpretation, it should not
come at the expense of the purpose behind the statute. Artisan’s liens are designed to
be equitable in nature and to protect the rights of artisans. If the artisan voluntarily
surrenders possession, the artisan loses its lien. However, if the artisan loses
possession through no action of his or her own, the artisan should not be punished.
This is especially true where the Lender benefitted from the repairs to its collateral
and its interests in the Equipment were in no way impaired when the Debtor took the
Equipment from the Artisan nor when he later returned the Equipment to the Artisan.
The bankruptcy court relied on the Glenn decision in reaching its conclusion
that continuous possession is required for an artisan’s lien. In Glenn, the artisan
returned the property to the owner upon receipt of a check for payment of the services.
When the check was dishonored, the artisan requested the owner to return the property
to the artisan, which the owner did. The Glenn court concluded that once the artisan
relinquishes possession, the artisan’s lien is lost and cannot be re-established by
regaining possession. Mack Fin. Corp. v. Peterbilt of Chattanooga, Inc. (In re Glenn),
20 B.R. at 100. However, the Glenn court expressly acknowledged that wrongfully
obtaining possession of the property subject to the lien dispute might change the
result. Id. at 101. The present situation, where the Debtor took the Equipment
without permission, is such a situation. In Glenn, the artisan could have protected
itself by demanding payment in collectible funds prior to release of the property. In
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the present case, the Debtor took the Equipment from the Artisan without permission.
The Artisan could not have prevented such wrongful action on the part of the Debtor.
The bankruptcy court was also concerned that allowing an artisan to regain its
lien by regaining possession of property would give the Debtor control over the
respective priorities between the Artisan and the Lender. The bankruptcy court cited
the Glenn decision which in turn quoted from the dissent in Thorp Commercial Corp.
v. Mississippi Road Supply Co. to support this policy argument. See Mack Fin. Corp.
v. Peterbilt of Chattanooga, Inc. (In re Glenn), 20 B.R. at 100-101, quoting Thorp
Commercial Corp. v. Mississippi Road Supply Co., 348 So. 2d at 1018 (Patterson,
C.J., dissenting). We hold that the Artisan did not lose its lien when the Debtor took
the Equipment without the Artisan’s permission. Therefore, this policy argument does
not impact our holding. Furthermore, the bankruptcy court’s decision accomplished
the very thing it set out to avoid – it allowed the Debtor to dictate the respective
priorities between the Artisan and the Lender by permitting the Debtor’s wrongful
taking of the Equipment to determine the outcome of the priority dispute at the trial
level.
Finally, the bankruptcy court determined that even if an artisan’s lien does not
require continuous possession and that such a lien can be revived when possession is
regained, the automatic stay of Section 362 of the Bankruptcy Code prevented the
Artisan from gaining possession of the Equipment or from perfecting a lien post-
petition. See 11 U.S.C. § 362. Therefore, according to the bankruptcy court, without
relief from the automatic stay the Artisan should not have been able to regain
possession of the Equipment. While technically true, this statement is incomplete and
ignores the entire picture.
On the Petition Date, the Artisan was in possession of the Equipment and thus
had an artisan’s lien with priority over the Lender’s security interest. The petition date
controls the allowance of claims in bankruptcy. See 11 U.S.C. § 502(b). Therefore,
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with respect to the Debtor’s bankruptcy case, the Artisan has a claim secured by an
artisan’s lien. Such a claim has priority over the Lender’s secured claim under
Nebraska law. Neb. Rev. Stat. U.C.C. § 9-333(b). Nothing in the Bankruptcy Code
alters this result. Therefore, the Artisan’s lien in the Equipment has priority over the
Lender’s security interest therein.
Furthermore, if all parties had played by the rules, the result would be the same
as that reached in this opinion. As of the Petition Date, the Artisan had possession of
the Equipment. If the Debtor wanted possession of the Equipment, he should have
sought its turnover pursuant to Section 542 of the Bankruptcy Code. See 11 U.S.C.
§ 542. The Artisan, in turn, would no doubt have demanded adequate protection of
its artisan’s lien under Section 363 of the Bankruptcy Code prior to releasing
possession of the Equipment. See 11 U.S.C. § 363(e). At such point in time, the
parties might have agreed upon a resolution or the court would have fashioned a
remedy that protected the Artisan’s lien interest while allowing the Debtor to use the
Equipment.1 It is fundamentally unfair to punish the Artisan for a technical violation
of the automatic stay which occurred as a result of the Debtor’s actions, not the
Artisan’s actions. This is especially true where the Lender was not harmed by the
Debtor’s taking of the Equipment and its subsequent return to the Artisan, and may,
in fact, have benefitted from the Debtor’s use of the Equipment to plant and harvest
a crop which may have produced funds to pay the Lender’s claim.2
1
The Debtor did not have the funds to satisfy the Artisan’s lien in return for
the Equipment. However, if made aware of the situation at the time, the Lender
might have agreed to finance the Artisan’s claim in exchange for the release of the
Equipment. Alternatively, the Court could have entered an order preserving the
Artisan’s lien or providing another form of adequate protection under Section 361
of the Bankruptcy Code.
2
The record lacks any evidence of harm or prejudice to the Lender by the
Debtor’s use of the Equipment during the 2005 growing season.
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CONCLUSION
The Artisan had an artisan’s lien in the Equipment on the date the Debtor filed
bankruptcy which had priority over the Lender’s security interest under Nebraska law.
The Artisan did not lose its artisan’s lien nor its priority over the Lender’s security
interest when the Debtor took the Equipment from the Artisan’s possession post-
petition without authority. Accordingly, under these circumstances we REVERSE the
bankruptcy court’s order determining that the Lender’s security interest in the
Equipment takes priority over the Artisan’s lien therein.
Kressel, Chief Judge, dissenting.
The majority has done an admirable job of reviewing the split of authority on
the issue presented here, none of which admittedly is binding, and picking the line of
cases which it feels provides the fair result for this case. I concede that the result
reached is appealing. I think that in reaching it, the majority has departed from well
established principles of interpretation and, as a result, has essentially engaged in the
legislative process.
Federal courts are frequently called upon to interpret state statutes. Often, we
are aided in that endeavor by decisions from the highest courts of the states involved.
Unfortunately, that is not always true and this case falls into this latter unfortunate
category. Like the majority, I was unable to find any Nebraska Supreme Court
opinions interpreting the statute upon which this appeal turns. “When presented with
a question of state law, upon which the state’s highest court has not yet ruled, the onus
falls to [the federal court] to determine what that court [the state supreme court] would
do, were it presented with the question.” Lincoln Benefit Life Co. v. Edwards, 243
F.3d 457, 465 (8th Cir. 2001) (quoting from Lindsay Mfg. Co. v. Hartford Accident
& Indem. Co., 118 F.3d 1263, 1267-1268 (8th Cir. 1997).
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While the Nebraska Supreme Court has not interpreted this statute, it does
inform us that:
In the absence of anything to the contrary, statutory
language is to be given its plain and ordinary meaning; an
appellate court will not resort to interpretation to ascertain
the meaning of statutory words which are plain, direct, and
unambiguous.
Ferguson v. Union Pacific Railroad Co., 258 Neb. 78, 601 N.W.2d 907 (1999).
Neb. Rev. Stat. § 52-201, which is the statute upon which Bellamy’s relies,
deals with the situation where the artisan has parted with possession. Neb. Rev. Stat.
§ 52-202 deals with a situation of a person who repairs farm implements “in cases
when he or she has parted with the possession of such property.”I feel that the
majority has engaged in legislative function by adding to § 52-201, the concept of
continued perfection, notwithstanding loss of possession. While it is a rule that results
in a fair outcome in this appeal, it may not be fair in other circumstances. I could
imagine a situation, for example, where the debtor, after he had used equipment, sold
it to a bona fide purchaser who is aware of the security interest in the equipment, but
unaware of Bellamy’s claim of an artisan’s lien. The majority’s holding would seem
to indicate that the purchaser purchased the equipment subject to Bellamy’s lien.
Somehow, this seems unfair. I think the balancing of these sorts of issues and the
proper solutions are best left to the Unicameral.
Since I think the Nebraska statute unequivocally provides for a first
priority possessory lien only until possession is lost, I would hold that the bankruptcy
court correctly held that Genoa National Bank’s perfected security interest has priority
over Bellamy’s lien and would affirm.
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