S.E. 2d
THE STATE OF SOUTH CAROLINA
In The Supreme Court
Ex Parte J.M. Smith
Corporation, Petitioner,
In Re: Greenwood
Petroleum Company,
Inc., Respondent,
v.
Thomas D. Wingard and
all personal property and
fixtures located at
Westside Pharmacy, Defendant.
ON WRIT OF CERTIORARI TO THE COURT OF
APPEALS
Appeal From Greenwood County
C. Victor Pyle, Jr., Circuit Court Judge
Opinion No. 25169
Heard January 5, 2000 - Filed July 10, 2000
REVERSED
Judson K. Chapin, III, of Greenville, for petitioner.
p.400
EX PARTE J.M. SMITH CORPORATION
Charles M. Watson, Jr., of Watson Law Firm, of
Greenwood, for respondent.
Lloyd I. Hendricks, of Columbia, and Philip T. Lacy,
of Columbia, for Amicus Curiae South Carolina
Bankers Association.
BURNETT, A.J.: This case concerns a priority dispute between
a perfected security interest and a landlord's distress lien. The Court of
Appeals held the landlord's lien took priority over the prior perfected
security interest. Greenwood Petroleum Co. v. Wingard (Ex parte J.M.
Smith Corp.), 330 S.C. 479, 498 S.E.2d 908 (Ct. App. 1998). We reverse.
FACTS
The essential facts of this case are not in dispute. Thomas and Gloria
Wingard operated Westside Pharmacy on premises leased from Respondent.
Petitioner has a perfected security interest in all the pharmacy's inventory,
proceeds, accounts, files, fixtures, and equipment, securing a debt of
$64,056.72. The Wingards filed for bankruptcy in December 1995 and the
pharmacy's lease was terminated as part of that case. The Wingards became
holdover tenants and respondent, the landlord, levied for distress pursuant
to S.C. Code Ann. §§ 27-39-210 through -360 (1976) and seized property
subject to petitioner's security interest to collect $12,000 in back rent.
Petitioner responded and asserted it held a senior security interest in
the seized property. The magistrate found the landlord was entitled to
distrain property owned by the tenant despite petitioner's security interest.
The circuit court and Court of Appeals affirmed. Greenwood Petroleum Co.
v. Wingard (Ex parte J.M. Smith Corp.), 330 S.C. 479, 498 S.E.2d 908 (Ct.
App. 1998). This Court granted certiorari to answer the following question:
Did the Court of Appeals err in holding that a landlord's lien
created by distraint takes priority over a prior security interest
perfected under the UCC?
p.401
EX PARTE J.M. SMITH CORPORATION
DISCUSSION
The Court of Appeals held a landlord's lien takes priority over a prior
perfected security interest. It found as a threshold matter that the Uniform
Commercial Code (UCC) was inapplicable to this case. It noted S.C. Code
Ann. § 27-39-260 (1976), which formerly established a priority rule for such
disputes, was repealed by the General Assembly in 1988. It then looked to
S.C. Code Ann. § 27-39-250 (Supp. 1998), concerning distraint of property of
others upon leased premises, and found "no indication that a landlord's
distress power is limited by the existence of a perfected security interest in
the distressed property." Ex parte J.M. Smith Corp., 330 S.C. at 482, 498
S.E.2d at 910. Citing Tolemac, Inc. v. United Trading, Inc., 326 S.C. 103,
484 S.E.2d 593 (1997), the Court of Appeals reasoned "[t]he legislature
intended for a landlord to be able to distrain the property of a third party,
even though a third party holds unencumbered, complete ownership of the
property." 330 S.C. at 482, 498 S.E.2d at 910. Finding "a secured creditor
sits in the same posture as a third party under § 27-39-250," the court held
the landlord took the distrained property free of petitioner's perfected
security interest. Id. at 482-83, 498 S.E.2d at 910. We disagree with both
the reasoning and result of the Court of Appeals' opinion.
The threshold problem arises because Article 9 of the UCC specifically
excludes landlords' liens from coverage. S.C. Code Ann. § 36-9-104(b) (1976).
Other state courts have resolved priority disputes between landlords' liens
and perfected security interests in a variety of ways. See generally,
Annotation, Secured Transactions: Priority as Between Statutory Landlord's
Lien and Security Interest Perfected in Accordance with the Uniform
Commercial Code, 99 A.L.R.3d 1006 (1980). A majority of courts addressing
the issue have applied non-UCC or pre-UCC law to resolve these disputes,
applying either a rule of absolute priority to one of the parties, depending on
the rule in effect, or following a rule of "first in time, first in right." Id. A
minority of courts have applied Article 9 rules to determine priority, despite
the exclusion of landlords' liens from Article 9's scope. The reasoning is that
landlords' liens are excluded because Article 9 is concerned with consensual
liens and landlords' liens arise by operation of law. However, the creation of
a lien outside the UCC does not necessarily mean the UCC is inapplicable to
determine its priority. See S.C. Code Ann. § 36-9-301(1)(b) (Supp. 1998)
(resolving priority disputes between secured creditors and those who acquire
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EX PARTE J.M. SMITH CORPORATION
a lien by "attachment, levy, or the like"). Courts which apply Article 9 to
cases such as this read the UCC broadly to govern priority among competing
liens, even when one of the liens arose outside Article 9.
We need not determine which of the above approaches to employ
because the legislature has already made clear its intent that UCC priority
rules resolve disputes such as this.. When the General Assembly repealed §
27-39-260 in 1988, it expressly replaced a non-UCC rule of priority with the
UCC rule. See Act No. 494, 1988 S.C. Acts 4519-20 (quoted below). The
former, non-UCC rule had been problematic in several respects. Although it
purported to grant priority to secured creditors, loopholes in the statute
sometimes permitted landlords to prevail over prior secured creditors. For
example, the wording of the statute gave a landlord priority over a secured
creditor if the lease had commenced or the property was brought upon the
leased premises before the creditor recorded its interest. See S.C. Code § 27
39-260 (1976) (repealed 1988). This was true even if the creditor perfected
its interest before the landlord's lien attached 1 and even if the landlord had
actual knowledge of the prior perfected security interest. See Frady v.
Smith, 247 S.C. 353, 147 S.E.2d 412 (1966).
In 1988, the General Assembly repealed § 27-39-260 with this
explanation:
The net effect [of § 27-39-260] is that a large number of fully
perfected nonpurchase money security interests are potentially
subordinate to distress liens. This is inconsistent with the
priority rules in the UCC. Section 36-9-301(1) states that a
perfected security interest takes priority over any lien creditor
unless the creditor obtains a lien before the security interest is
perfected; and a landlord cannot qualify as a lien creditor until
after distress and levy.
1 A landlord's right to distrain a tenant's property arises automatically
when the lease commences, but an actual lien does not attach until the
tenant defaults and the landlord levies for distress. Burnett v. Boukedes,
240 S.C. 144, 125 S.E.2d 10 (1962). This timing gap served to exacerbate
problems enforcing an already troublesome rule.
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EX PARTE J.M. SMITH CORPORATION
Act No. 494, 1988 S.C. Acts 4519-20. See also S.C. Code Ann. § 36-9-313
(Supp. 1998) (S.C. Reporter's Comments, n.2) ("As is pointed out . . . there
was a conflict between the priority rules in the UCC and Sections 27-39-50
and 27-39-260 of the 1976 South Carolina Code which dealt with rights of
landlords vis-a-vis persons claiming interests in chattels located on leased
real estate. Sections 27-39-50 and 27-39-260 have therefore been repealed
because if not, a lessor of real estate would have certain rights under these
statutes that might undercut the priority given a fixture financer under
Section 9-313.") The Reporter's Notes make very clear that in repealing §
27-39-260, the General Assembly did not intend to leave courts without a
rule for determining priority, but to defer in all cases to UCC priority rules.
This intent was implicitly recognized by this Court in Oxford Finance
Co. v. Burgess, 303 S.C. 534, 402 S.E.2d 480 (1991). In Oxford Finance, the
tenants leased a lot for a mobile home on November 13, 1986. On November
15, the tenants purchased a mobile home and executed a purchase money
note and security agreement, granting the seller a security interest in the
mobile home. The security interest was perfected on March 27, 1987. In
1989, the tenants vacated the premises, defaulted on the purchase money
note, and became delinquent on rent payments to the landlord. A dispute
then arose between the landlord and the secured creditor for possession of
the mobile home. The landlord relied on § 27-39-260, which had been
repealed effective January 1, 1989. The Court noted that while § 27-39-260
may have given the landlord some rights to the mobile home, its repeal
operated retrospectively. Id. at 537-38, 402 S.E.2d at 481. The Court
therefore affirmed judgment for the secured creditor.
Although we did not discuss priority rules in Oxford Finance, we
implied that the repeal of § 27-39-260 eliminated the possibility of a landlord
claiming priority over a prior secured creditor. This result is not inconsistent
with Tolemac, Inc. v. United Trading, , 326 S.C. 103, 484 S.E.2d 593
(1997), relied upon by the Court of Appeals. Tolemac held that landlords can
distrain property belonging to third parties located on the leased premises.
Id. at 106, 484 S.E.2d at 595. The purpose of the Tolemac rule is fraud
prevention. If property belonging to third parties is not subject to distraint,
a delinquent tenant "is likely to become rapidly bereft of all possessions."
James Johnson, Note, Get in Line, the Line Forms at the Door: A Landlord's
Lien for Distraint Enjoys Seniority Over Prior Perfected Security Interests in
South Carolina, 50 S.C. L. Rev. 1051, 1060 (1999). The concerns that require
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EX PARTE J.M. SMITH CORPORATION
the rule in Tolemac do not exist where there is a publicly recorded security
interest, giving the landlord notice of exactly what property on the premises
is unavailable to distrain. The Court of Appeals erred in equating third
party owners with perfected secured creditors, when the two differ in very
significant respects. First, perfected secured creditors have taken every step
possible to protect their interests to the full extent provided by law. Second,
perfected secured creditors have given public notice of their interests. These
features of security interests entitle them to heightened protection. Tolemac
has no application in a priority dispute between a perfected secured creditor
and a landlord.
Applying UCC priority rules, a secured party who perfects its security
interest before a creditor acquires a lien upon the collateral by "attachment,
levy, or the like" has priority over the lien creditor. S.C. Code Ann. § 36-9
301(1)(b) & (3) (Supp. 1998). A landlord does not become a lien creditor until
it levies for distress. Burnett v. Boukedes, 240 S.C. 144, 125 S.E.2d 10
(1962). Therefore, petitioner's prior perfected security interest has priority
over respondent's lien.
CONCLUSION
The result reached by the Court of Appeals is exactly what the
legislature sought to avoid when it repealed § 27-39-260: "fully perfected
nonpurchase money security interests . . . subordinate[d] to distress liens."
Act No. 494, 1988 S.C. Acts 4519-20. In repealing § 27-39-260, the General
Assembly made very clear its intent that UCC priority rules replace the
repealed statute. The Court of Appeals erred in finding UCC priority rules
do not govern priority disputes between' secured creditors and landlords, and
in treating secured creditors as the equivalent of third party property
owners.
REVERSED.
FINNEY, C.J., TOAL, J., and Acting Justices C. Tolbert Goolsby, Jr.
and George T. Gregory, Jr., concur.
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