“Lease” Lien Vs. Possessory Lien

This is Part II of my discussion of Gangloff Industries v. Generic Financing, 2009 Ind. App. LEXIS 897 (Ind. Ct. App. 2009) (.pdf).  Click here for last week’s post.  Having concluded that Generic had a security interest in the semi-truck, the Indiana Court of Appeals turned to whether Gangloff had a possessory lien and, if so, whether Generic’s security interest had priority over Gangloff’s lien.  Asset-based lenders who find themselves in a dispute with a mechanic or storage facility over the rights to possession of loan collateral should find this post informative.  

Possessory lien.  The Court first explained that Gangloff did in fact have a possessory lien.  In Indiana’s “Scrapping Motor Vehicles” statute, specifically I.C. § 9-22-5-15(a) and (b), a “possessory lien” is granted to an entity that “performs labor, furnishes material or storage, or does repair work on a . . . semi-trailer . . . at the request of the person who owns the vehicle” or that provides towing services on the vehicle “for reasonable value of the charges for such labor, materials, storage, repairs or towing.”  In Indiana, this possessory lien “is perfected by retention of possession of the vehicle by the person asserting the lien.”  Gangloff had a possessory lien because it fronted the semi-truck’s repairs, towing expenses and storage fees for which Bougher did not pay.  Gangloff perfected its lien because it retained possession of the semi-truck (until the trial court ordered Gangloff to relinquish possession to Generic). 

Priority dispute.  Indiana’s portion of the UCC dealing with secured transactions, at I.C. § 26-1-9.1-333(a), generally defines a possessory lien as:

an interest, other than a security interest or an agricultural lien:  (1) that secured 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) that is created by statute or rule of law in favor of the person; and (3) whose effectiveness depends on the person’s possession of the goods.

The Court acknowledged that the UCC recognized Gangloff’s statutory, possessory lien.  Pursuant to Section 333(b), the possessory lien “has priority over a security interest . . . unless the lien is created by a statute that expressly provides otherwise.”  Since I.C. § 9-22-5-15 is silent as to the priority of competing liens, Gangloff’s possessory lien took priority over Generic’s security interest.  As such, the Court of Appeals reversed the trial court’s judgment awarding damages and attorney’s fees in favor of Generic and remanded the case for further proceedings. 

The risks/rewards of possession.  The trial court originally held that Gangloff owed Generic excess repossession expenses, lost lease income, witness travel expenses and attorney’s fees.  The trial court seemingly based its conclusion upon Gangloff’s wrongful possession of the semi-truck.  The reversal and remand by the Court of Appeals signaled, however, that it was Gangloff who should recover damages, consistent with its lawful, perfected possessory lien.  It appears that, before Generic can act upon its security interest in the semi-truck, Generic must satisfy Gangloff’s possessory lien.  But ironing out the wrinkles going forward may be complicated due to the trial court’s initial, erroneous order of possession.  Perhaps the alleged damages incurred by the respective parties will be offset against one another in order to arrive at a conclusion as to who owes money to whom. 

One of many lessons from Gangloff is that, if you’re a possessory lien holder and if you feel strongly about the validity of your lien, you should stand firm and  not surrender the collateral until your lien is satisfied.  On the other hand, possessory lien holders can be exposed to liability to a secured lender if the lien is flawed or it wrongfully retains control over the collateral.  These cases can be tricky and expensive, as documented in the Gangloff litigation.