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Liens and Priorities

A lien is an encumbrance on one person’s property, real or personal, to secure a debt the property owner owes to another person.  A lien is a formal document signed by the party to whom money is owed, and sometimes by the debtor who agrees to the amount due.  The right of lien generally arises by operation of law, but in some cases it is created by express contract.  A lien carries with it the right to sell property, if necessary, to obtain the money.  A mortgage or a deed of trust is a form of lien.

The types of liens that are generally recognized are common-law liens, equitable liens, and statutory liens.  An equitable lien differs essentially from a common-law lien.  A common law lien is the mere right to retain the possession of some chattel until a debt or demand due the person thus retaining it is satisfied.  Possession of the property is an essential necessary element and if it is voluntarily surrendered by the creditor, the lien is at once extinguished.  In equitable lien, possession remains with the debtor, who holds the proprietary interest.

There are numerous types of liens including: a mechanic’s lien against the real property upon which a workman, contractor or supplier has provided work or materials, an attorney’s lien for fees to be paid from funds recovered by his/her efforts, a medical lien for medical bills to be paid from funds recovered for an injury, a landlord’s lien against a tenant’s property for unpaid rent or damages, a tax lien to enforce the government’s claim of unpaid taxes, or the security agreement authorized by the Uniform Commercial Code. Most liens are enforceable in the order in which they were recorded or filed (in the case of security agreements), except tax liens which have priority over the private citizen’s claim.

To create a valid lien, the party to whom or by whom it is acquired should have the absolute property or ownership of the thing, or a right to vest it.  The party claiming the lien should have an actual or constructive, possession, with the assent of the party against whom the claim is made.  A lien may be waived or lost by any act or agreement between the parties, by which it is surrendered, or becomes inapplicable.  A lien may also be lost by voluntarily parting with the possession of the goods.

The current rule of priority is first in time first in right.  The priority of liens generally depends upon the time that they attach or become specific and perfected.  Usually, a prior lien gives a prior legal right that is entitled to prior satisfaction 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.  Notice of a prior lien is necessary to render it superior to another lien.

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