On August 12, 2013, Judge Ellen Hollander of the United States District Court for the District of Maryland affirmed a ruling of the bankruptcy court that Susquehanna Bank had priority over an IRS lien because the bank’s deed of trust was executed before the IRS lien was recorded, even though the IRS lien was recorded prior to the recordation of the deed of trust. United States of America/Internal Revenue Service v. Susquehanna Bank, In Re Restivo Auto Body, Inc., Civil Action No. ECH-12-3597, 2013 WL 4067624 (D. Md. Aug. 12, 2013).
On January 4, 2005 Susquehanna Bank made a loan of $1,006,065.72, and Restivo Auto Body, Inc. granted the bank an indemnity deed of trust in that amount on two parcels of real property in Carroll County. Six days later, the IRS filed a Notice of Federal Tax Lien against Restivo for $147,392.84. The bank’s deed of trust was not recorded until 32 days after that.
Restivo filed for bankruptcy, and one of the properties subject to the deed of trust was sold pursuant to order of the bankruptcy court. The proceeds of the sale were held in escrow pending resolution of the dispute about the priority of the positions of the IRS and the bank. The bankruptcy court held that the bank had priority, and the District Court affirmed.
The federal tax lien was created under 26 U.S.C. §6321. The priority of the liens under that section is a matter of both federal and state law. Although federal law controls the priority of federal tax against competing liens against the property of a taxpayer, it is necessary to determine whether under Maryland law a security interest existed when the notice of the tax lien was filed. Further, IRS tax liens are treated no better and no worse than other third-party judgment liens under state law.
Pursuant to Maryland Code, Real Property Article, §3-201, “Every deed, when recorded, takes effect from its effective date as against the grantor, his personal representatives, every purchaser with notice of the deed, and every creditor of the grantor with or without notice.” (Emphasis is by the District Court.) Under the Real Property Article, the term “deed” includes a deed of trust. Also, the effective date of a deed is the date of its delivery, which is presumed to be the later of the date of its last acknowledgment or the date on the face of the deed.
Therefore, the bank’s deed of trust became effective on January 4, 2005, when it was executed and delivered. The bank had priority over the federal tax lien because a notice concerning it was not recorded until January 10, 2005.
Judge Hollander engaged in an interesting discussion about the use of the present perfect tense (“has become perfected”) because of an argument raised by the IRS. However, the District Court agreed with the bank’s view that there was no “relation back” in granting priority to the deed of trust because under Maryland law the security interest was created six days before the Notice of Tax Lien was filed.
Additionally, Judge Hollander held that the bank would have had priority even had the deed of trust never been recorded. The District Court likened the bank’s position to that of a contract purchaser who obtains equitable title to the subject property, even though the contract is not recorded, under the doctrine of equitable conversion, and held that the bank was entitled to the protection afforded to a bona fide purchaser.
In the final footnote of the case, Judge Hollander considered the value of recording instruments in the land records because the decision of the case was that the recordation of the bank’s deed of trust was irrelevant to the result. Judge Hollander noted when there are two bona fide purchasers for value, the one who records first obtains priority. Also, the order of recordation affects priority of judgment creditors whose judgments were entered in a different jurisdiction, or priority between a judgment lien and a deed held by someone other than a bona fide purchaser.
For questions about this, please contact Ed Levin at (410) 576-1900.