By: Lauren Durr Emery
In Susquehanna Bank v. United States of America/ Internal Revenue Service, the Fourth Circuit examined competing claims from Susquehanna Bank and the Internal Revenue Service (IRS) to a company’s assets following its filing of Chapter 11 bankruptcy.
On September 20, 2004, the IRS assessed tax deficiencies in excess of $60,000 from Restivo Auto Body, Inc. (Restivo) for unpaid employment taxes. However, the IRS did not file a lien until January 10, 2005. On January 4, 2005, Restivo borrowed $1 million from Susquehanna Bank secured by a deed of trust for two parcels of property. Susquehanna Bank did not record the deed until February 11, 2005. In April of 2011, Restivo filed for Chapter 11 bankruptcy and Susquehanna sought a declaratory judgment from the court that its security interest had priority over the tax lien filed by the IRS.
Though federal law governs federal tax liens, 26 U.S.C. §6323(h)(1)(A) gives an IRS tax lien only those protections that local law would afford to “a subsequent judgment lien arising out of an unsecured obligation.” Thus, the court had to examine Maryland law to see if any of its provisions gave the bank priority in those circumstances.
Does a bank’s security interest in a parcel of land have priority over a federal tax lien if it was secured by a deed of trust executed before the lien, but not recorded until after?
The district court found that the security interest held by the bank had priority over the federal tax lien for two reasons. First, the district court found that Md. Code Ann., Real Prop. § 3-201 allows a deed of trust’s effective date, upon recordation, to be the date when the deed of trust was executed. In this way, it concluded, that though the deed of trust was recorded on February 11, 2005, the relation-back provision meant it was effective as of January 4, 2005 when the deed was executed. In this way, Susquehanna’s interest had priority. Second, the district court found that the bank’s security interest would have taken priority even if the deed had never been recorded based on Maryland’s doctrine of equitable conversion. This doctrine entitles the holder of a deed of trust to the same protections as a bona fide purchaser, who takes title free and clear of all subsequent liens regardless of recordation.”
Fourth Circuit says Maryland’s relation-back provision does not give Susquehanna Bank priority over IRS
The Fourth Circuit held that the district court erred in its application of the relation-back provision in Md. Code Ann., Real Prop. § 3-201. It reasoned that the deed was only subject to the relation-back protections after it had been recorded. Thus, since the deed was not recorded until February 11, 2005, it did not yet relate back by when the IRS had filed its tax lien on January 10, 2005.
Fourth Circuit finds Susquehanna Bank does have priority over the IRS tax lien as a result of equitable conversion
Under Maryland’s doctrine of equitable conversion, when lenders, like Susquehanna Bank, receive a conditional deed to secure repayment of its loan, it receives the same protections as a bona fide purchaser for value. In contrast, the IRS is treated as a judgment creditor and its claim is “subject to prior, undisclosed equities” and “must stand or fall by the real and not apparent rights of the defendant in the judgment.” Thus, upon the execution of the deed of trust on January 4, 2005, Susquehanna Bank secured an interest in the property which precedes the IRS tax lien of January 10, 2005.
Dissent: Susquehanna Bank’s interest is not protected by equitable conversion
In Judge Wynn’s dissent, he argues that Restivo never had an unencumbered title which it could convey to Susquehanna Bank. Instead, he states that the federal tax lien arose at the time of the original assessment on September 20, 2004. Judge Wynn explains that this is a tax lien, rather than a judgment lien as the majority argues, and thus is governed solely by federal law. Thus, this lien did not need to be filed or recorded in order to have priority. Instead, he argues that the case should be governed by the principle “first in time is first in right.”