Prepare for Unpaid Repairs

What to do when a repair company claims a lien on equipment

How can a repair or storage provider claim a lien that trumps your first priority security or
ownership interest? It can happen. Here is how to respond to those claims.

You receive a letter to begin your workday at ABC Equipment Finance Company. The letter states that certain equipment with a named owner will be sold in just a few days to pay an unpaid repair bill. Quickly you determine that the owner is one of your customers, and, yes, the specified equipment is financed by your company. Your research on the state statute referenced in the letter shows the statute may allow the repair company to sell the equipment, free and clear of your security interest, with the sale proceeds paid first to cover that unpaid repair bill.

Later that day you call the repair company. The repair company tells you that the bill must be paid in the next few days or the equipment will be sold. Further, the repair company will not provide any details on what repairs were done. Your next call is to the customer. When called, the customer will also not provide any information on the repairs. Additionally, the customer is past due, with a crumbling financial situation. The customer is not troubled when told that you can add the repair expenses you pay to the account balance. You suspect the customer may be considering bankruptcy and may be colluding with the repair company.

The following day you pay the repair costs. A month later the customer goes bankrupt. Two months later your bankruptcy attorney tells you she suspects (but cannot prove) the repair company grossly inflated the repair bill and shared some of the bill payment with the customer. You ask what you did wrong. Here is what you find out.

The Applicable Law

Every state has special statutes that allow providers of equipment repairs or storage to claim a lien on the repaired or stored equipment. Some of those states allow that lien to be a first priority lien, superior to the rights of the equipment owner and the rights of any security interest holder, including otherwise super priority purchase money security interests.

Under Uniform Commercial Code (UCC) section 9–333, as enacted in all states, a “possessory lien” on goods has priority over a security interest in those goods unless the state statute provides otherwise. A “possessory lien” must be—

1. for the payment for services or materials furnished with respect to those goods by a person in the ordinary course of business;
2. created by a statute or “rule of law,” which can be state court cases; and
3. that person has retained possession of those goods.

UCC language around good faith and fair dealing provides support for courts that decline to enforce repair liens for excessive (or possibly fraudulent) repair costs.

Repair Companies and First Priority Liens

A repair company’s repair/storage lien priority is not automatic. A repair company must, first, with some limited exceptions noted below, have kept possession of the equipment from the completion of its services through the equipment sale date. If it lets your customer have the equipment, it generally loses its super priority first lien.

Second, a repair company must fully comply with all the requirements of the applicable state statute or case law. If a particular statute requires a notice with specific content to be provided to the owner and secured parties at a specified time, a repair company must fully comply with all of those statutory requirements. State law may also provide for specific notices with detailed content and delivery requirements. Finally, state law may require specific public notices by posting and/or publication.

Typically, the equipment owner must have requested the repairs. Many state repair lien laws require that the services provided enhance or improve the goods. However, generally, that enhanced value does not need to be material. The enhanced value also need not equal or exceed the unpaid repair charge. Alternatively, state law may require that the work performed was intended to enhance or preserve the value of the goods. Claims that the sale by the repair provider would be an unconstitutional “taking” of the owner’s interest or the purchase money lender’s security interest have not been successful.

In addition to the enhanced value that the repair brings, the reasonableness of the repair bill also can be at issue. While some courts have held that the repair or storage charges must be reasonable, that is not the rule in all states. Depending on state law, you may be able to limit the repair or storage provider’s first lien super priority to the reasonable charge amount.

Gaps in the repair lien provider’s possession may or may not destroy the first lien super priority. Some courts have allowed numerous exceptions to the continuous possession requirement. These exceptions include the unauthorized recovery of the equipment by the owner; surrender of possession for what turns out to be a bad check or breached written promise to pay; and release of the equipment to allow the owner to earn money to pay for the repairs, to collect an insurance claim or to comply with a later vacated court order. Any gaps or surrender of possession must be evaluated under the applicable state law to determine if the repair company waived the first lien super priority or if it maintained what some courts have called “constructive possession.”

Your Position in Equipment Sales

An equipment lender potentially has two options when facing the sale of equipment to satisfy unpaid repairs. One option is to pay the repair company for the customer’s outstanding bill. Some states allow for another option: Post a bond that covers the outstanding repair cost in order to stop the equipment sale. Because not all states allow for the bond-posting option, equipment lenders should prepare to pay the unpaid repair bill in order to obtain possession. Lenders under that scenario would then file suit to recover for the paid repair amount.

Knowing Your Options

The unpaid repair company scenario that began this article might land on your desk. Understanding the applicable law can help you when that repair scenario arrives. Appreciation for how courts construe repair lien statutes can help you, too: While some courts recognize lender paths to defeat repair company lien priority in equipment, courts generally apply repair lien statutes with a preference towards the repair company. Knowing your options can help you to prepare for the unpaid equipment repair.