Liens - A Snapshot

Q. What is a lien?
A. A lien is a claim or a charge on property as security for the payment of a debt. It gives the person to whom the debt is owed, the lienholder, or lienor, a right to have the property sold to pay the debt. In most states a mortgage is a lien. Some liens, called statutory liens, are created by law, such as a tax lien that attaches to the property of a person who has failed to pay his real estate tax. Others, called equitable liens, are created under equity agreements or court judgments prompted by fairness rather than a particular law.

Q. When is an equitable lien created?
A. An equitable lien may be either express or implied. An express equitable lien is one that arises from a written contract that shows an intention to charge some property with a debt. For example, if you buy a computer with a personal check and the contract of sale expressly (specifically) states that the computer store owner will have a lien against your car if the check is no good, that lien against your car is an express lien. An express equitable lien may be governed by the laws of Secured Transactions if it is recognized as a secured transaction by Article 9 of the Uniform Commercial Code (UCC). For example, if you buy that same computer on an installment plan and use the computer as collateral for the unpaid amount, the lien on the computer creates a secured transaction. Not all liens are secured transactions, however. For example, a landlord's lien to collect rent is specifically excluded from the definition of a secured transaction under Article 9 of the UCC. An implied equitable lien is one declared by a court from general considerations of right and justice based on the conduct and dealings of the parties. When a lien is an equitable one, the property in question remains in the possession of the debtor.

Q. When is a statutory lien created?
A. Various types of liens are created by statute. For most statutory liens the property is in the possession of the lienholder. If you are in possession of someone else's property and you have improved that property or have performed some services for the owner in the ordinary course of business, you may have a lien on the property if the owner refuses to pay you for your improvements or services. Such liens are either specific or general. In a certain type of statutory lien, a mechanic's lien, the property remains in the hands of the debtor. A specific statutory lien arises when services are performed that add to the value of personal property (any property that is not real estate), creating a debt. The property remains in the possession of the lienholder until the debt is paid, but the debtor still owns the property. Most cases involving specific liens concern what is called "Bailment" the handing over of personal property to someone else for a particular purpose, such as giving an item to someone so that he/she can perform some work on it. For example, if you take your ring to a jeweler to have it resized, you are giving the jeweler the right to keep the ring in his possession until it can be fixed. This is a bailment. In these circumstances, the jeweler has a specific lien, called an artisan's lien, on the ring he has resized for you until you pay for the services performed. If you fail to pay for the work, the jeweler can keep the ring and may be permitted to sell it to pay your debt. Any excess over the jeweler's bill must be returned to you. If you had also taken a necklace to be fixed, the jeweler would not have a lien against the necklace based on the ring resizing. A specific lien attaches to the particular item that has been serviced. A specific lien is dependent on the fact that the lienholder has continuous possession of the property in question. If he gives up possession, he loses his lien and will have to sue for his payment. The right to keep the property ends when the debt has been paid or if there has been substantial misuse by the lienholder. If the jeweler who resized your ring allowed his wife to wear it to a party, for instance, this might be considered sufficient misuse for him to lose his lien. If the lienholder refuses to give up the property, he may be liable for conversion (wrongful possession or use of someone else's property). Other examples of statutory liens are a hotelier who has a lien on the baggage of a guest to secure charges for his hotel stay or a freight transporter who is given a lien to the extent of his charges for the transportation of goods and any reasonable expenses incurred in protecting them.

Q. When does a general lien take effect?
A. A general lien arises out of a series of transactions in the general course of business rather than a single specific transaction such as the repair of a piece of jewelry or a computer. Attorneys, bankers, and Factors usually have general liens (A factor is an agent who sells goods that the owner has entrusted to him). To insure that his client will pay him for services already performed, an attorney may retain possession of the papers and personal property of his client that fall into his hands in his professional capacity. He also has a charging lien on any judgment he has obtained for his client for the value of his services. A banker may retain stocks, bonds, or other papers that come into his hands from his customer for any general balance owed by the customer. A factor or commission merchant may hold onto all goods entrusted to him for sale by the owner of the goods for any balance due. The merchant may sell the goods to satisfy his lien, but he must account to the owner for any excess realized from the sale. General liens occur less frequently than specific liens.

Q. What is a mechanic's lien?
A. A mechanic's lien is a type of statutory lien which applies to a contractor, subcontractor, laborer, or building supplier who worked or furnished material for building construction or improvement. Suppose your neighbor hires a contractor to add an extra room to his house. After the work is completed, your neighbor loses his job and cannot afford to pay the bill. The contractor will have a mechanic's lien on the house. By law, the "owner" of a building subject to a mechanic's lien can be the actual owner, a lessee, or anyone else who has a legally protected interest in the property. Generally, property devoted to public use is not subject to a mechanic's lien. To establish a mechanic's lien, you must usually show that the materials furnished or labor performed went into something that became part of the real estate. Whether the value of the real estate must have been increased depends on the statute under which the lien is claimed. Many laws allow a lien for interior improvements and fixtures goods that are attached to real estate but that can be removed, such as stoves, heaters, and furnaces. A mechanic's lien can also attach for window frames, glass, and window and door screens, but not for window shades. A lien may exist for mirrors or mirror cases set in a wall but not for mirrors in removable frames because a mechanic's lien is on the entire property, not on the specific improvement made to it. A mechanic's lien usually must be recorded with the county clerk's office or in the registry of deeds (Bureau of Conveyances). This gives notice of a lien on real estate to persons who are interested in buying it. Generally, any valid lien is enforceable against anyone who purchases that property. The filing requirement, therefore, is an important protection for both the lienholder and potential buyers of real estate. When there is a mortgage as well as a mechanic's lien against property, the one recorded first will be paid off first in states where these obligations must be filed. Otherwise, the first debt created will be paid first. After a recorded mechanic's lien has been paid or settled, the owner of the property should make sure the cancellation or discharge of the lien is filed.

Q. Can a lien be assigned?
A. Traditionally, liens were personal and could not be assigned (transferred)that is, someone with a lien against your property could not sell or otherwise transfer that lien to a second party. Today some states permit assignment of liens by a specific contract but the debt that the lien secures must also be transferred. Usually statutory liens are not considered assignable.

Q. How can a lien be enforced?
A. A lien may be enforced by an action to foreclose. An action to foreclose is a lawsuit brought by the lienholder in which the court decides whether or not the property should be sold. If the court decides for the lienholder, it will issue an order for the sale. The proceeds from the sale are used to pay off the debt and any court costs. The excess will be returned to the debtor. If he has the property in his possession, a lienholder often has the right by law to sell it to satisfy his lien without going to court, once he has given proper notice to the debtor.

Q. How do you get rid of a lien?
A. A lien may be discharged, or ended, when the debtor pays the debt or when the lienholder agrees to waive it. A lien may be lost by the destruction of the property on which the lien exists. It may also be lost when the lien is created by operation of law. For example, by law a creditor has a lien against the estate of a debtor who dies, but he loses the lien if the estate is insolvent, that is, if there are more debts against it than it is worth. Under some laws, a lien is discharged when proceedings to enforce it are not begun within the time limit set by law.

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