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25169 - Ex Parte J.M. Smith Corp. v. Wingard
Ex Parte J.M. Smith Corp.


Shearouse Adv. Sh. No.
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



p. 402


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.



p.403


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



p.404


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.



p.405