Chambers v. Nation

• Court: Colorado Supreme Court
• Writing for the Court: PRINGLE
• Citation: Chambers v. Nation, 497 P.2d 5, 178 Colo. 124 (Colo. 1972)
• Decision Date: 10 April 1972
• Docket Number: No. C--141,C--141
• Parties: , 59 A.L.R.3d 270 Leo CHAMBERS, Petitioner, v. C. E. NATION, Respondent.

Page 5

497 P.2d 5

178 Colo. 124, 59 A.L.R.3d 270

Leo CHAMBERS, Petitioner, v. C. E. NATION, Respondent.

No. C--141.

Supreme Court of Colorado, En Banc.

April 10, 1972.

Rehearing Denied May 30, 1972.

Rodden, Cooper, Woods, & Mitchell, C. James Cooper, Jr., Denver, for petitioner.

Hellerstein & Hellerstein, Stephen A. Hellerstein, Francis J. Manning, Denver, Kenneth Breneman, Fort Morgan, for respondent.

PRINGLE, Chief Justice.

This action is the result of a cross-claim filed by Chambers against Nation, both of whom were defendants in the trial court in a separate action. We will hereinafter refer to both parties by name.

The facts of this case have been stipulated to by the parties. Leo Chambers is the holder of a mechanic's lien upon an oil and gas well and related property which has an effective date of November 18, 1964. On December 31, 1964, C. E. Nation entered into a leasing arrangement with Jack L. Hennig, the well owner, whereby Nation furnished and installed a pumping unit and sucker rods for Hennig. The lease contained an option to purchase for a small consideration in addition to the required rental payments. When Hennig defaulted in his rental payments, Nation, on September 14, 1965, removed the equipment. He thereupon sued Hennig and was awarded a deficiency judgment. To execute upon this judgment, Nation garnisheed the proceeds from oil which had been removed from the well. Chambers alleged in the cross-claim filed by him that as holder of a prior subsisting mechanic's lien, his right to the equipment repossessed by Nation as well as to the proceeds from the oil extracted from the well, was superior to Nation's.

The trial court ruled in favor of Chambers. It decided that the lease was in effect a chattel mortgage and as such was invalid as against Chambers' mechanic's lien. It then concluded that Chambers was entitled to possession of the property which had been removed by Nation. In arriving at this conclusion, the trial court relied upon C.R.S.1963, 86--5--3 and 86--5--7. These sections deal specifically with 'Liens on Wells and Equipment.' The trial court further concluded that the proceeds of the oil were subject to Chambers' mechanic's lien and could not therefore be garnisheed by Nation.

The Colorado Court of Appeals reversed, Nation v. Chambers, 29 Colo.App. 413, 486 P.2d 460, holding that a mechanic's lien on wells and equipment does not take priority over a purchase money security agreement even though that security agreement comes into existence after the inception of the mechanic's lien. The Court of Appeals reasoned that as the delivery of title and creation of security interest are simultaneous in a purchase money mortgage, the purchaser, Hennig, never acquired a title to which Chambers' pre-existing mechanic's lien was able to attach. The Court of Appeals also reversed the trial court's conclusion that Chambers was entitled to a judgment against Nation for the amount of the proceeds of oil which Nation had garnisheed from Hennig, giving as its reason the fact that Colorado's lien statute pertaining to wells and equipment, C.R.S.1963, 86--5--1, does not anywhere expressly grant a mechanic's lien against the proceeds payable for production from a well. Because this Court has not heretofore specifically addressed itself to the important questions raised by this action, we granted certiorari.

As the Court of Appeals correctly perceived, this action presents who central issues for consideration. The first is whether the vendor of oil well equipment who has a purchase money security interest in the equipment may remove it upon default of the purchaser, or, whether the equipment is subject to a valid mechanic's lien which has an effective date that is prior to the date of the purchase money security agreement. The second question is whether such a mechanic's lien which attached to oil in the ground is rendered invalid because the oil was thereafter removed from the ground and ultimately sold, or, whether the lien can be asserted against the proceeds paid for the oil. After examining the applicable law in this area, we agree with the Court of Appeals with respect to these two issues and affirm.

I.

The first issue is resolved when reference is made to the Colorado statute which specifically delineates the property which may be subject to mechanics' liens, C.R.S.1963, 86--5--1. Section 1 provides that:

'Every person . . . who performs labor upon . . . any gas well, oil well or other well, . . . shall have a lien to secure the payment thereof upon the properties mentioned, Belonging to the party or parties contracting with the lien claimants . . . To the extent of the right, title and interest of the owner, part owner or lessee . . . and such lien shall extend to any Subsequently acquired interest of any such owner, part owner or lessee.' (Emphasis added).

We agree with the trial court that the 'lease' was in effect a chattel mortgage and hereafter deal with it as though it were a purchase money mortgage. Illinois Building v. Patterson, 91 Colo. 391, 15 P.2d 699; Frank v. Denver & Rio Grande Ry. Co., 23 F. 123 (C.C.Colo.). The language of C.R.S.1963, 86--5--1 becomes relevant in this action when one considers that in any purchase money security agreement the title to the property which is the subject matter of the agreement never rests with the purchaser in an unencumbered state. The purchaser never acquires a title which is completely free of the vendor's security interest, and, in the language of section 1, the property does not really 'belong' to him, except in an equitable sense. It follows, then, that the lien granted Chambers by section 1 could not and did not attach to Nation's purchase money security interest in the personal property involved here.

Chambers' lien, by the express wording of the statute, could only attach 'to the extent of the right, title and interest' of Hennig and here Hennig acquired only an equitable interest in the property subject to Nation's security claim. Fosdick v. Schall, 99 U.S. 235, 25 L.Ed. 339; Frank v. Denver & Rio Grande Ry. Co., Supra; F. Storke and D. Sears, Colorado Security Law, § 22 at 75. Recognizing this rationale, this Court has consistently held, as we do today, that a purchase money security interest in property takes precedence over any pre-existing lien. Bank of Denver v. Legler, 142 Colo. 333, 350 P.2d 1059; Robinson v. Wright, 90 Colo. 417, 9 P.2d 618; Emery v. Ward, 68 Colo. 373, 191 P. 99.

Chambers argues that section 1 of the lien statute mandates that his lien 'shall extend to any subsequently acquired interest of any such owner, part owner, or lessee' and that therefore the equipment acquired by Hennig subsequent to the effective date of the mechanic's lien should be subject to the lien. Again, this argument ignores the fact that even though the statute provides that Chambers' lien shall extend to 'after-acquired' property, the lien can nevertheless only attach to such interest as the purchaser acquired. If, as in this case, the property comes into the hands of the purchaser already encumbered with a purchase money lien, a prior mechanic's lien remains subordinate to the purchase money mortgage, Myer v. Car Co., 102 U.S. 1, 26 L.Ed. 59; Fosdick v. Schall, 99 U.S. 235, 25 L.Ed. 339; Simons v. Lee James Finance Co., 56 Wash.2d 234, 351 P.2d 507; and it cannot displace the security interest which is the subject matter of the purchase money...