IRS Liens & the Unrecorded Mortgage
In 2004, the IRS assessed unpaid tax
deficiencies against the Debtor, creating a lien on the property. On January 4,
2005, Debtor executed and delivered a deed of trust (DOT) covering the property
to Bank. Six days later, on January 10, 2005, the IRS filed notice of a federal
tax lien against Debtor. On February 11, 2005, Bank recorded the DOT.
Debtor later went into Chapter 11. The
district court granted Bank priority, ruling (1) a Maryland statute perfected
Bank’s security interest by “relating back” to the delivery date of the DOT;
and (2) under the common law doctrine of equitable conversion, Bank obtained a
protected equitable security interest, regardless of recordation, when Debtor executed the DOT.
A divided Fourth Circuit panel found the
relation-back provision had not been triggered, yet upheld the lower court’s
equitable conversion rationale. Susquehanna
Bank v. U. S. (In re Restivo Auto Body, Inc.),
#13-2249, (U.S.C.A., 4th Cir., October 31, 2014). Under the Internal Revenue Code, “an IRS tax lien
is entitled only to the protection due under state law to ‘a subsequent
judgment lien arising out of an unsecured obligation.’” In Maryland, judgment
liens are subject to a prior, albeit undisclosed, equity such as a DOT.
The dissenting view poses the
greatest concern to lenders and title insurers. The dissent points out the lien
arose upon assessment of the tax deficiencies and continued to burden the
property at the time the DOT was given (which is correct). But that judge failed
to address IRC §6323(a), which explicitly makes the pre-existing federal tax
lien invalid against a secured lender until the notice of lien is filed in the
land records. The dissent also contends the Bank was not a “purchaser” until
the DOT was recorded, but IRC §§6323(h)(1) and 6323(h)(6) provide a secured
lender need not be a “purchaser” to benefit from the notice provision.