Minnesota Sections 514.18, 514.19 and 336.9-333 – Bailment possessory lien rights of bailee with continuous possession have priority over all security interests, regardless whether secured party has notice of bailee’s lien interest when security interest is created.

Under appropriate circumstances, possession remains king in Minnesota when it comes to lien priority under the Uniform Commercial Code (“UCC”). The Minnesota Court of Appeals outlined the applicable law governing possessory liens in Dusenbery v. Hawks, 895 N.W.2d 640 (Minn. App. 2017), where a loan creditor held a security interest in certain equipment belonging to the debtor pursuant to a written security agreement and a duly filed UCC financing statement. However, at the time the creditor's security interest was created and perfected, the equipment was in the possession of a third-party bailee, who was maintaining the equipment in storage under a bailment/storage agreement with the debtor. At the time the loan creditor’s security interest was created and placed of record, the bailee in possession did not have a financing statement or anything else on file with the Minnesota Secretary of State regarding the equipment. The loan creditor’s financing statement therefore was prior in time as a matter of filing under the UCC. The loan creditor also claimed she did not know of the bailee’s possession of the equipment at the time the loan creditor’s security interest was perfected.

The debtor did not repay the loan creditor when the loan became due. The loan creditor ultimately commenced suit against the debtor and the bailee in district court for a money judgment against the debtor and for a judicial determination allowing the creditor to take possession of the secured equipment as the most senior lien creditor. With no discovery conducted, motions for a Rule 12 dismissal on the pleadings and for summary judgment were immediately brought by the Plaintiff creditor. Despite the bailee’s claim of priority as the party in possession, the trial court, in part, declared the creditor’s perfected security interest to be superior to all other creditors, including that of the bailee.

In reaching its decision on priority, the trial court held that the bailee in possession would have priority if the loan creditor knew of the possession prior to accepting the security interest in the equipment. The trial court went on to find that the debtor and bailee failed to present any evidence of such knowledge in defense of the summary judgment motion. As a result, the trial court found no issue of material fact existed that would bar summary judgment, and thereby granted the loan creditor superior right to take possession of the equipment. The debtor and bailee together appealed.

On appeal, the Minnesota Court of Appeals held as to the lien priority issue that the creditor’s knowledge at the time of creating her security interest was entirely irrelevant and immaterial, and that the bailee’s possession of the equipment, if prior and continuous, constituted a possessory lien superior to all filed UCC financing statements, even in the absence of a UCC financing statement filed by the bailee. The Court of Appeals found that the trial court erred as a matter of law regarding the prior knowledge issue, but then remanded the case for further determination on the issue of whether the bailee’s possession of the equipment had remained continuous.

The essence of the lien priority ruling in Dusenbery lies in its thoughtful interpretation and discussion of the provisions of §514.18, which the Court first recites as controlling:

“Section 514.18, which governs lien interests in personal property, provides:

“Subdivision 1. Mechanics’ lien on personal property. Whoever, at the request of the owner or legal possessor of any personal property, shall store or care for [the property] ... shall have a lien upon such property for the price or value of such storage ... and the right to retain possession of the property until such lien is lawfully discharged.

“Subd. 2. Nonpossessory lien; notice. Notwithstanding the voluntary surrender or other loss of possession of the property on which the lien is claimed, the person entitled thereto may preserve the lien upon giving notice of the lien at any time within 60 days after the surrender or loss of possession, by filing in the appropriate filing office under the Uniform Commercial Code, Minnesota Statutes, section 336.9-501 a verified statement and notice of intention to claim a lien. The statement shall contain a description of the property upon which the lien is claimed, the work performed or materials furnished and the amount due.

“Subd. 3. Priority; security; interest; foreclosure. The lien shall be valid against everyone except a purchaser or encumbrancer in good faith without notice and for value whose rights were acquired prior to the filing of the lien statement and who has filed a statement of interest in the appropriate filing office. The lien shall be considered a security interest under the Uniform Commercial Code and foreclosure thereon shall be in the manner prescribed for security interests under article 9 of the Uniform Commercial Code.”

Id., at 641.

The Court of Appeals rejected the trial court’s conclusion that Subdivision 3 of § 514.18 governs both possessory and non-possessory liens. With hornbook precision, the opinion written by Judge Hooten sets out a detailed history of the priority given in Minnesota to bailment possessory liens in Minnesota:

“Subdivision 3 indicates that its restrictions apply only to a nonpossessory lien created in subdivision 2. Its first sentence provides that “[t]he lien” shall be valid against all except a party who purchased or encumbered the property in good faith and without notice “whose rights were acquired prior to the filing of the lien statement.” Minn. Stat. § 514.18, subd. 3 (emphasis added). This implies that the limitations of subdivision 3 apply only to bailment liens that require the filing of a lien statement.

“A brief history of bailment liens suggests that a bailee-in-possession lien interest governed by subdivision 1 need not file a lien statement, but the nonpossessory bailment lien created by subdivision 2 does require a lien statement. At common law, one who contributed to the improvement of personal property had a lien against that property as to the value of the improvement, so long as he or she remained in possession. See Green v. Farmer (1768) 98 Eng. Rep. 154, 159 (determining that dyer of cloth had lien on possessed cloth only for amounts owed under current transaction, not for unpaid debts of previous transactions).

“Minnesota codified this common law principle in 1905. See Minn. Rev. Laws § 3521 (1905). The 1905 version of the bailment lien statute is materially identical to the 2016 version of section 514.18, subdivision 1, except that the 1905 version concluded with the following sentence: “But a voluntary surrender of possession shall extinguish the lien herein given.” Id.

“From decisions issued between the codification of the possessory bailment lien and the addition of subdivisions 2 and 3, we can draw three additional conclusions. First, continuous possession of the personal property was required to maintain the lien. See, e.g., In re Express Fruit & Produce, Inc., 16 B.R. 366, 368 (Bankr. D. Minn. 1982) (“In order to maintain a possessory lien under [Minn. Stat.] § 514.18, the creditor must retain possession of the personal property upon which the work was done.”), aff’d sub nom. Leonard v. Dahlke Trailer Sales & Leasing Co., No. 4-82-103, 1982 WL 171055 (D. Minn. Aug. 4, 1982). Second, the statutory bailment lien automatically arises when the owner of personal property entrusts that property to a bailee *645 for storage or repairs, and no filing is required. See In re Serbus, 53 B.R. 187, 188-89 (Bankr. D. Minn. 1985) (observing that under section 514.18, one who stores corn at request of owner has statutory bailment lien on that corn, and “[t]here is no need to file any documentation in regard to such a lien. The lien simply arises upon storage”). Third, the statutory bailment lien has priority over previously granted security interests on personal property. See Stebbens v. Balfour, 157 Minn. 135, 137, 195 N.W. 773, 774 (1923) (holding that the bailee’s lien “is intended to be superior” to previously granted security interests).

“In 1984, the legislature removed the final sentence of subdivision 1, requiring continuous possession, and added subdivisions 2 and 3. 1984 Minn. Laws ch. 479, § 1, at 439–40. Subdivision 2 enables a bailee in possession of personal property who loses possession to convert his or her bailment lien into a nonpossessory lien by filing a lien statement in the same manner as a secured party. Minn. State § 514.18, subd. 2. The explicit language of subdivision 2 presupposes a bailment lien under subdivision 1, allowing that “the person entitled [to a bailment lien] may” file a lien statement within 60 days if that person wishes to “preserve the lien” after possession is lost. Id. (emphasis added).

“In sum, no lien statement was required at common law for the type of bailment lien governed by section 514.18, subdivision 1. Following the addition of subdivision 2, a lien statement is required to preserve a bailment lien only when a bailee-in-possession of the personal property loses possession. The limiting language in subdivision 3, which requires the filing of a lien statement, therefore must necessarily affect only the priority of a nonpossessory lien created by subdivision 2.

“Our interpretation is further reinforced by the fact that, before the adoption of subdivisions 2 and 3, a bailment lien had priority over a security interest in that property without regard to whether the secured party had actual notice of the bailment lien, because the secured party was charged with constructive notice of the bailee’s interest in the property. See Clark v. Corser, 154 Minn. 508, 510, 191 N.W. 917, 918 (1923) (“Possession of property is always full constructive notice to the world of the rights of the possessor.”). As no statute explicitly or by necessary implication abrogates this common law constructive notice principle, we assume it remains. See Ly v. Nystrom, 615 N.W.2d 302, 314 (Minn. 2000).

“Because the limiting language of section 518.14, subdivision 3, applies only to the nonpossessory lien created by subdivision 2, the possessory lien governed by subdivision 1 is subject to the default rule of possessory lien priority. That is, a party currently in possession with a statutory lien has priority over all security interests, regardless of date of filing. Minn. Stat. § 336.9-333(b).”

Id., at 644.

The case was therefore remanded since the trial court had incorrectly found that Plaintiff did not have knowledge of the bailee’s possessory lien, and no evidence or finding existed as to whether the bailee’s possession was continuous.

Take-away: The decision in Dusenbery v. Hawks, 895 N.W.2d 640 (Minn. App. 2017), correctly found that a bailee-in-possession’s lien has priority over all competing security interests, regardless whether the competing interest was the subject of a prior UCC filing with the Minnesota Secretary of State, or whether a secured party had notice of the bailee’s lien interest when its security interest was created. Knowledge of the competing interest does not matter. What does matter is that the bailee have maintained continuous possession of the secured property throughout the period of time in competition with the other secured interests.

By Rick Leighton and Steve Hetland

Leighton Hetland PLLP

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