Summary of a Recent
Judicial
Development in
Bankruptcy
Creditor's Lien Extinguished by Voluntary
Relinquishment of Property
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Shelby v. Farmers and Merchants Bank (In re Schoenhals), BAP No. WO-04-070, 2005 Bankr. LEXIS 15 (B.A.P. 10th Cir. 2005), the Tenth Circuit Bankruptcy Appellate Panel held that a special lien obtained pursuant to § 91(A)(1) of title 42 of the Oklahoma Statutes is extinguished when the creditor voluntarily relinquishes possession of the property that is the subject of the lien.
Background
The debtors owned a tractor, and Farmers and Merchants Bank (Bank) held a perfected purchase money security interest against it. Id. at 2. Shelby took possession of the debtors' tractor in May 2003 and made numerous repairs to it. Id. at 3. He then returned it to the debtors so they could use it to farm their land, although they didn't compensate him for his services. Id. In November 2003, Shelby took possession of the tractor again to repair it, and kept it thereafter. Id. The debtors filed for Chapter 12 bankruptcy in December 2003, and Shelby filed a proof of claim against the tractor, asserting a secured claim based on a "valid, perfected, possessory garageman's lien." Id. The Bank objected to his proof of claim and argued that he didn't have a lien against the tractor because had voluntary relinquished possession of it after the repairs had been made. Id. at 4. After a hearing, the bankruptcy court held that Shelby's lien had been extinguished because he voluntarily relinquished possession of the tractor and there was no evidence of any lien agreement between Shelby and the debtors. Id. at 5-6. Shelby appealed. Id.
Arguments
The Bank argued that Shelby's lien had been extinguished when he voluntarily released the debtor's tractor back to the debtors. Id. at 4.
Shelby argued that he had a valid lien against the tractor because, although he didn't have physical possession of the tractor, he had constructive possession of it. Id. at 8. He argued alternatively that he and the debtors had an agreement that the lien would continue. Id. at 11.
Analysis and Holdings
The panel noted that Shelby had a valid special lien against the tractor before he relinquished possession of it, pursuant to an Oklahoma statute that stated, "[a]ny person who, while lawfully in possession of an article of personal property, renders any service to the owner thereof by furnishing material, labor or skill for the . . . improvement . . . thereof, has a special lien thereon, dependent on possession, for the compensation, if any, which is due to such person from the owner for such service . . . ." Id. at 6. The statute makes it clear that such lien is "dependent on possession." Id. at 7. Shelby's argument that he had constructive possession of the tractor failed because the state statute he relied upon (§ 91(B)(4) of title 42 of the Oklahoma Statutes) does not apply to a lien created under § 91(A)(1). Id. at 8. The language of § 91(B)(4) reads that constructive possession is sufficient "for purposes of this subsection," meaning only subsection B. Id at 9. Moreover, the panel stated that even if it did apply to subsection A, Shelby had not presented any evidence of constructive possession. Id. at 10. The panel agreed with the bankruptcy court that there was no evidence of an agreement between Shelby and the debtors that the lien would continue. Id. at 11. Therefore, the panel affirmed the judgment of the bankruptcy court and determined that Shelby's lien was extinguished when he voluntarily relinquished possession of the tractor back to the debtors. Id. at 12.
The case was decided on January 14, 2005.