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When attorneys fail to agree on how to simply pronounce a four letter word, the prospects are not good for agreeing on much else about what to do with the word. Such is the case with the lien. We all have a basic understanding of what a “leen” is, or the practical value of possessing a “lee-ən” on someone’s property. However, the Ninth Edition of Black’s Law Dictionary identifies no less than 69 specific variations of liens in its general definition of lien.1 This brief article is intended to start demystifying this jumbled world of liens and provide a bird’s eye view of liens for today’s practitioner seeking to enforce payment of a secured debt.

For starters, a lien is generally defined as a “legal right or interest that a creditor has in another’s property, lasting usu[ally] until a debt or duty that it secures is satisfied. Typically, the creditor does not take possession of the property on which the lien has been obtained.”2 Ultimately, most practitioners are concerned with establishing when such a lien is enforceable, both against the lienee as well as against competing lienholders staking a claim to the property. First, though, we should start with a basic understanding of where liens come from.

Sources of LiensThere are five main sources of liens, which should not be

confused with types of liens. The main sources are: (1) statute; (2) agreement of the parties; (3) judicial actions when equity requires; (4) established custom and usage of a particular trade; and (5) from a mode of dealing between the parties.3 Unless created by operation of some positive rule of law, like a statute, generally a property owner must consent to the lien.4 Consent from the property owner may be by implied or express contract.5 However, even in the absence of a statute or consensual agreement, courts may decree an equitable lien when certain equities exist.6

Types of LiensFrom these sources of liens, courts and commentators

have generally categorized liens into three main types.7 They are statutory liens, equitable liens, and common-law liens.8 Correlated with the sources identified above, statutory liens clearly arise by statute; equitable liens generally arise by agreement of the parties or through judicial action when equity requires; and common-law liens arise from established custom and usage of a particular trade or from a mode of dealing between the parties.

Common-Law Liens

Originally, there were common-law liens. A common-law lien is the right to retain possession of property belonging to another until certain obligations are fulfilled.9 It is directly based on the principle of possession.10 A common-law lien only gives the power of possession. It does not confer power to sell the property for purposes of paying the lien.11 For example,

feature article

You Say Lee- n, I Say Leen :Demystifying Liens So That More Secured Debts Are Paid

by Ben Thompson

Ben Thompson

Ben Thompson is the founding and managing attorney at Thompson Law Office in West Omaha. He thinks about liens often enough that they creep into his dreams. He thought it was time to say something. He can be replied to at 402-330-3060, ext. 111.

e

➡

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a court of equity has no jurisdiction to foreclose upon a bill solely for the purpose of selling the property. However, if the court obtains jurisdiction for another purpose, it may order the sale of the property to satisfy a common-law lien.12 Because a common-law lien is based on possession, a court of equity will not recognize a common-law lien where possession is not legally present.13

In Nebraska, nonconsensual common-law liens are disfavored.14 A nonconsensual common-law lien is defined as any lien that is not a statutory lien, does not depend on the consent of the property’s owner, and is not an equitable or constructive lien imposed by a court.15 Persons found to have recorded such liens against either personal or real property can be held liable for actual damages plus costs and reasonable attorney’s fees.16 Further, the law provides for such liens to be refused for recording,17 and if recorded, stricken from the record.18

Equitable Liens

An equitable lien can be decreed when a lienor demonstrates to the court that they are owed a debt, duty, or obligation by another who intended for some identifiable and described property to serve as security for the debt, duty, or obligation; the leinor is entitled to a debt; and there is no other adequate remedy at law available to the lienor.19 Unlike a common-law lien, possession of the property remains with the debtor when an equitable lien is claimed.20

Equitable liens may be created by express contract, or by implication stemming from relations and dealings between the parties.21 Assignment of a contract, debt, or fund also creates equitable liens along with judicial decrees.22 Some courts have held that equitable liens may be claimed based on the doctrine of unjust enrichment, although it has also been held that such a remedy is not justified if damages are available for unjust enrichment.23

There is some confusion about whether an equitable lien is more properly characterized as a remedy by which a court decrees a lien even in the absence of an agreement, or whether it also includes liens agreed to by the parties but merely enforced in an equitable proceeding. However, courts and commentators generally characterize as equitable liens any liens not arising from the common-law or created by statute, regardless of whether the lien was agreed to by the debtor.

Statutory Liens

Statutory liens are liens created by statute.24 They do not require possession or consent.25 Subject to constitutional limits, the legislature has the power to create liens providing for the payment of debts and various other obligations.26 Legislative authority includes the ability to create a right of lien that did not exist at common law.27 The legislature also possesses the

power to define, limit, and establish the priority of statutory liens.28 A positive legislative enactment prescribing conditions essential to the existence and preservation of a statutory lien may not be disregarded.29

Statutory liens are limited both in operation and extent by the terms of the statute itself.30 They only arise and can only be enforced under the facts provided in the statute.31 Courts are unable to extend the right of lien to cases not provided for within the statute.32 Statutory liens are to be strictly construed as to persons they benefit, and the procedure necessary to perfect and lien.33 In instances where the legislature codifies a common law lien, the lien must conform to the common law principles.34 However, if the legislature has expanded and defined a common-law lien, the statute supersedes the common law definitions of the courts.35

The existence of a statutory lien depends on compliance with the terms of the statute.36 Courts have held both that strict compliance is necessary, as well as substantial compliance as sufficient.37 The courts that found substantial compliance as sufficient determined that “substantial compliance” was based on the degree of noncompliance; the underlying policy of the statute in question; and the potential for prejudice that parties with an interest in the property may suffer as a result of noncompliance.38 The Nebraska Court of Appeals has found substantial compliance sufficient for the hospital lien statute.39

Enforceability and Priority of LiensIn general, a lien becomes “choate” and enforceable against

the lienee or debtor as soon as the lien “attaches.” For the lien to become enforceable against a third party, the lien must first be “perfected.” Many courts and commentators have used interchangeably the terms “inchoate,” “choate,” “attachment,” and “perfection” in evaluating when liens are enforceable. Unfortunately, Nebraska court cases are inconsistent in their treatment of these terms and concepts as well.40

However, Black’s Law Dictionary succinctly defines attachment as it pertains to security interests as:

4. The creation of a security interest in property, occurring when the debtor agrees to the security, receives value from the secured party, and obtains rights in the collateral. UCC § 9-203. Cf. PERFECTION.

In contrast, perfection is defined as:

Validation of a security interest as against other creditors, usu. by filing a statement with some public office or by taking possession of the collateral. Cf. ATTACHMENT (4).41

Note that the definition of each explicitly directs the reader to compare the term to the other.

Given these two different concepts, a lien may attach and be enforceable as to the lienee at a different time than it is

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dEmySTifying LiEnS

existed of the competing interest. Other more specific statutes may govern priority as to specific liens.

methods of Enforcing LiensThe appropriate method of enforcing liens generally

depends on the type of lien involved. A common-law lien, being possessory in nature, is self-enforcing. An equitable lien generally involves a court action to weigh the equities in a given case. Enforcement of a statutory lien is prescribed by the statute by which it is created.55 If the statute creates a specific remedy for the enforcement of the statutory lien, the court of equity lacks jurisdiction to enforce it. A statutory provision that provides for the foreclosure of the statutory lien is exclusive and must be followed. Where a statute creating a lien provides no method for its enforcement, it may be enforced by an ordinary action at law for the collection of the debt.56

Before you Call the Whole Thing OffThere is still much to say about liens – but it will require

another dream. For now, know that when seeking to enforce a lien, the practicing attorney should have a firm grasp of where the lien came from, how it is classified, and any special rules for enforcing it as against competing liens seeking priority.

Endnotes1 BLACK’S LAW DICTIONARY, (9th Ed. 2009).2 BLACK’S LAW DICTIONARY, (9th Ed. 2009).3 53 C.J.S. LIENS § 10 (2012).4 Id. 5 Id. 6 Id.7 51 AM JUR 2D LIENS § 7 (2010).8 Id.9 51 AM JUR 2D LIENS § 25 (2010).10 Id.11 Id. at §80.12 Id.13 Id.14 Neb. Rev. Stat. § 52-1901 to § 52-1904 (2012). 15 Neb. Rev. Stat. § 52-1901 (2012).16 Neb. Rev. Stat. § 52-1902 (2012).17 Neb. Rev. Stat. § 52-1903 (2012).18 Neb. Rev. Stat. § 52-1904 (2012).19 51 AM JUR 2D LIENS § 34 (2010).20 51 AM JUR 2D LIENS § 7 (2010).21 51 AM JUR 2D LIENS § 39 (2010).22 Id.23 51 AM JUR 2D LIENS § 38 (2010).24 51 AM JUR 2D LIENS § 52 (2010).25 Id.26 Id. at § 53.27 Id.28 Id.

perfected and enforceable against a third party creditor. The critical distinction is that attachment merely requires that the identity of the lienor, the property subject to the lien, and the amount of the lien be established;42 whereas perfection requires notice to the third party.43 As noted in American Jurisprudence, Second Edition:

The perfection of a lien protects the lienor from third parties without knowledge and protects third parties who act in good faith and without notice; perfection does not change the relationship of the lienor and lienee. ‘Perfection’ refers to that single date, or moment in time, when a creditor obtains a superior lien that cannot be overcome by another creditor on a simple contract.44

A lien created by statute is limited in operation and extent by the terms of the statute and can arise and be enforced only in the event and under the facts and conditions provided in the statute.45 It cannot be extended by the court to cases not within the statute.46 A positive legislative enactment prescribing conditions essential to the existence and preservation of a statutory lien may not be disregarded.47

Liens created by agreement or statute are subordinate to all existing rights in the property and are generally governed by the rule “first in time, first in right.”48 The priority of liens generally depends upon the time that they attach or become specific and perfected. Ordinarily a prior lien gives a prior legal right that is entitled to prior satisfaction out of the subject it binds (“first in time, first in right”), unless the lien is intrinsically defective or is displaced by some act of the party holding it or unless the priority of liens is regulated by a statute that provides a different priority rule.49

For personal property, the common law rule would generally apply. The Uniform Commercial Code extends a similar rule to secured transactions covered by the Code. It provides that “[p]riority dates from the earlier of the time a filing covering the collateral is first made or the security interest or agricultural lien is first perfected.”50

In the case of debts secured by real property, the traditional “first in time, first in right” rule’s “significance has been greatly reduced by legislation.”51 “The recording acts adopted in most states carve out two exceptions to the basic first-in-time rule.”52 A major exception recognized by almost all states is that of the bona fide purchaser doctrine.53

Such is the case with Nebraska’s recording act at Section 76-238, which is a “race-notice” statute. It requires that a bona fide purchaser have no notice of earlier interests in the property. One must both “win the race” and be without notice to claim the protection of the recording act.54 This statute contrasts with the common-law “first in time” rule in that the latter is concerned solely with dates of recording, whereas the former considers both the date of recording and whether notice ➡

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42 United States v. New Britain, 347 U.S. 81. 84, 74 S.Ct. 367, 98 L.Ed. 520 (1954). See also 51 AM JUR 2D LIENS § 8 (2010).

43 See 51 AM JUR 2D LIENS § 8 (2010); 51 AM JUR 2D LIENS § 68 (2010).

44 51 AM JUR 2D LIENS § 22 (2010).45 County Board of Supervisors v. Breese, 171 Neb. 37, 105 N.W.2d

478 (1960).46 Neb. Health Sys. v. Bear (In re Marshall), 10 Neb. App. 589 (Neb.

Ct. App. 2001).47 County Board of Supervisors v. Breese, 171 Neb. 37, 105 N.W.2d

478 (1960).48 51 AM JUR 2D LIENS § 68 (2010). 49 51 AM JUR 2D LIENS § 70 (2010).50 Neb. Rev. Stat. (U.C.C.) § 9-322 (2012).51 John G. Sprankling, UNDERSTANDING PROPERTY

LAW § 24.02 (2nd Ed. 2007).52 Id.53 Id. at § 24.03.54 Neb. Rev. Stat. § 76-238(1) (“All deeds, mortgages, and other

instruments of writing which are required to be or which under the laws of this state may be recorded, shall take effect and be in force from and after the time of delivering such instruments to the register of deeds for recording, and not before, as to all creditors and subsequent purchasers in good faith without notice.”).

55 51 AM JUR 2D LIENS § 81 (2010).56 Id.57 53 C.J.S. LIENS § 32 (2012).

29 County Board of Supervisors v. Breese, 171 Neb. 37, 105 N.W.2d 478 (1960).

30 Id. at § 54.31 Id.32 Id.33 Id.34 Id.35 Id.36 Id. at § 56.37 Id.38 Id.39 Neb. Health Sys. v. Bear (In re Marshall), 10 Neb. App. 589 (Neb.

Ct. App. 2001).40 See West Nebraska General Hosp. v. Farmers Ins. Exchange,

239 Neb. 281, 75 N.W.2d 901 (1991) (accurately recognizing distinction; “A hospital lien is enforceable against the patient upon attachment, but perfection is required if the hospital seeks to enforce the lien against third parties.”); cf. Allied Mut. Ins. Co. v. Midplains Waste Mgmt., L.L.C., 259 Neb. 808, 612 N.W.2d 488 (2000) (inaccurately confusing perfection for attachment; “For purposes of the first in time rule, a competing state lien is in existence only when it has been perfected in the sense that the identity of the lienor, the property subject to the lien, and the amount of the lien are established.”); Omaha Nat’l Bank v. Continental Western Corp., 203 Neb. 264, 270, 278 N.W.2d 339, 343 (1979) (inaccurately confusing perfection for attachment; “When, however, several junior lienors have taken security upon the same tract, their relative priority will depend upon the time when their liens attached.”).

41 BLACK’S LAW DICTIONARY (9th Ed. 2009).