Statutory Liens Versus Security Interests

November 9, 2015 | dehs

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by Robert E. Hayes

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Occasionally a secured lender is faced with circumstances in which a third party claims a lien on the Lender’s collateral which the third party asserts has priority over the Lender’s security interest. The South Dakota Uniform Commercial Code has two statutory provisions which address such a dispute. First, SDCL 57A-9-109(d)(2) provides that Article 9 of the Uniform Commercial Code does not apply to a “lien, other than an agricultural lien, given by statute or other rule of law for services or materials. . . .” That same section, however, states that “SDCL 57A-9-333 applies with respect to priority of the lien.” Subsection (b) of SDCL 57A-9-333 provides “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.”

“Possessory lien” is a term defined by the provisions of subsection (a) of SDCL 57A-9-333. The important language in this statute is that which limits priority of the possessory lien holder where “the lien is created by a statute that expressly provides otherwise.”

Among the most common possessory liens which may create disputes with secured lenders is the occupational and commercial lien on personal property granted by SDCL 44-11. Essentially this lien is granted to anyone who furnishes “skill, labor, materials, parts, accessories, supplies or facilities for the alteration, repair, replacement of parts, storage, keeping, maintenance, or preservation on any personal property. . . .” This lien is specifically made “dependent on possession”, and frequently Lenders are faced with the assertion by a repair shop or storage facility that their lien has priority over a secured interest, and that they will retain possession or threaten to sell the property without regard to the secured position of the Lender. Fortunately for Lenders, this lien is specifically made subject to “liens, mortgages and conditional sales contracts” which are properly filed and perfected at the time the property comes into the possession of the lien claimant. As a result, a perfected security interest will ordinarily have priority over a subsequent occupational lien. The same limitation applies to self-storage facilities and their liens.

There are, however, agricultural liens which do provide a means by which the lien claimant can obtain priority over an existing perfected security interest. Prominent among these are agister’s liens, seed liens and thresher’s liens. Even though seed liens and thresher’s liens would not be considered “possessory liens”, the Uniform Commercial Code nonetheless applies because they are considered “agricultural liens”. The creation and perfection of these types of liens often requires the filing of a statement with the Register of Deeds and a UCC filing in order to be perfected. Once perfected, an agricultural lien can take priority over a preexisting perfected security interest. If a Lender is faced with a claim of priority by this type of lien claimant, it is important to review the statute under which the lien is created to determine whether the lien claimant has met the filing deadlines which are created, separate and apart from the Uniform Commercial Code, by that statute.

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.