Hidden Liens Report, a project of the Commercial Transactions Committee of the Business Law Section of The State Bar of California
II. List and Discussion of Hidden Liens
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 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 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 Lien:

  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 specified, 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, undertaking 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 § 214421 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 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 California.

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]

Endnotes

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

II-C. Liens Arising in Litigation / Table of Contents