Lance R. Pomerantz
Attorney at Law

Land     Title     Law

“Constructive Notice”  The  Newsletter

Excerpted from the Nov. 13, 2014 mailing of "Constructive Notice":

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.