Legal Definitions - factor's lien

A factor's lien is a legal claim that an agent, known as a "factor," holds over goods belonging to another party, called the "principal," when those goods are in the factor's possession.

Essentially, it's a security interest that allows the factor to ensure they get paid for their services, commissions, or expenses related to handling or selling the principal's goods. If the principal fails to pay what they owe, the factor can use this lien to recover the outstanding debt from the secured property.

Historically, factor's liens often arose automatically from the relationship between the factor and the principal, particularly under common law. While many modern security interests are now covered by comprehensive statutes like the Uniform Commercial Code (UCC), factor's liens still exist in specific situations, especially when the agreement between the parties might not fully document the factor's interest in the property.

Here are some examples illustrating how a factor's lien might apply:

• Art Gallery Consignment: Imagine an artist (the principal) places several paintings with an art gallery (the factor) to be displayed and sold. The gallery charges a commission on sales and also incurs costs for insurance and special marketing events. If the artist fails to pay the gallery its agreed-upon share from sold artworks or other outstanding fees, the gallery could assert a factor's lien on the remaining unsold paintings still in its possession. This allows the gallery to hold those paintings as security until the artist settles the debt.

• Specialty Food Distributor: A small farm (the principal) produces unique organic vegetables and contracts with a specialty food distributor (the factor) to store, market, and sell its produce to high-end restaurants. The distributor charges fees for storage, handling, and a percentage of sales. If the farm falls behind on paying these agreed-upon fees, the distributor could place a factor's lien on the unsold produce still held in its refrigerated warehouse. This lien ensures the distributor has a legal claim on the produce to recover the unpaid service charges.

• Fashion Showroom Agent: A new fashion designer (the principal) hires a showroom agent (the factor) to display and promote their latest clothing line to retail buyers. The agent keeps a selection of garments in their showroom for potential buyers to view and order, and they charge the designer a monthly retainer plus a commission on all sales. If the designer fails to pay the agent's retainer or commissions, the agent could exercise a factor's lien on the clothing samples and inventory remaining in their showroom. This provides the agent with a means to secure payment for their services.