In Re: RESTIVO AUTO BODY, INC., d/b/a Restivo Auto Body & Towing, Inc., Debtor. SUSQUEHANNA BANK, Plaintiff - Appellee,
UNITED STATES OF AMERICA/INTERNAL REVENUE SERVICE, Defendant - Appellant
Argued September 16, 2014
Appeal from the United States District Court for the District of Maryland, at Baltimore. (1:12-cv-03597-ELH; 11-18718; 11-00734). Ellen L. Hollander, District Judge.
Bethany B. Hauser,
UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellant.
Ian Thomas Valkenet, YOUNG & VALKENET, Baltimore, Maryland, for Appellee.
Kathryn Keneally, Assistant Attorney General, Bridget M. Rowan, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Rod J. Rosenstein, United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Baltimore, Maryland, for Appellant.
Thomas C. Valkenet, YOUNG & VALKENET, Baltimore, Maryland, for Appellee.
Before NIEMEYER, WYNN, and FLOYD, Circuit Judges. Judge Niemeyer wrote the opinion, in which Judge Floyd joined. Judge Wynn wrote a separate opinion concurring in part and dissenting in part.
NIEMEYER, Circuit Judge:
In this appeal, we determine priority as between a tax lien filed bye the Internal Revenue Service (" IRS" ) and a bank's security interest created by a deed of trust
that was executed before the IRS filed its lien but recorded thereafter.
On January 4, 2005, Restivo Auto Body, Inc., of Eldersburg, Maryland, borrowed $1 million from Susquehanna Bank and secured repayment of the loan by executing and delivering to the Bank a deed of trust with respect to two parcels of real property. Six days later, on January 10, 2005, the IRS filed notice of a federal tax lien against Restivo Auto Body for unpaid employment taxes. On February 11, 2005, Susquehanna Bank recorded the deed of trust it had received on January 4, 2005.
Susquehanna Bank commenced this adversary proceeding in Restivo Auto Body's Chapter 11 bankruptcy case, seeking a judgment declaring that the security interest it acquired on January 4, 2005, had priority over the IRS's tax lien filed on January 10, 2005, regardless of the fact that it did not record its security interest until after the IRS had filed notice of its tax lien.
The district court granted Susquehanna Bank priority, ruling (1) that Md. Code Ann., Real Prop. § 3-201, related back Susquehanna Bank's subsequent recordation of its deed of trust to the date the deed of trust was executed and delivered, thus giving Susquehanna Bank a security interest effective before the IRS recorded its tax lien; and alternatively (2) that Maryland common law, under the doctrine of equitable conversion, gave Susquehanna Bank a protected equitable security interest in Restivo Auto Body's property, regardless of recordation, when Restivo Auto Body executed the deed of trust in exchange for the $1 million loan on January 4, before the IRS recorded its tax lien.
We reject the district court's holding that Md. Code Ann., Real Prop. § 3-201 gives Susquehanna Bank retroactive priority over the IRS, concluding that 26 U.S.C. § 6323(h)(1)(A)'s use of the present perfect tense precludes giving effect to Real Prop. § 3-201's relation-back provision. We nonetheless affirm the judgment of the district court on the ground that under Maryland common law, Susquehanna Bank acquired an equitable security interest in the two parcels of real property on January 4, regardless of recordation, because its interest became " protected . . . against a subsequent lien arising out of an unsecured obligation" on that date and that therefore its security interest had priority over the IRS's tax lien under 26 U.S.C. § 6323(a) and § 6323(h)(1).
Restivo Auto Body failed to pay employment taxes for the fourth quarter of 2002, the first quarter of 2003, and the first and second quarters of 2004. The IRS issued notice and demand for payment of these deficiencies on or before September 20, 2004, giving rise to a tax lien on all property owned by Restivo Auto Body. On January 10, 2005, the IRS filed notice of its federal tax lien for the relevant quarters in the land records in the Circuit Court for Carroll County, Maryland.
On January 4, 2005, six days before the IRS filed notice of its federal tax lien, Restivo Auto Body borrowed $1 million from Susquehanna Bank, giving the Bank a note and a deed of trust on two adjacent parcels of real property on Enterprise Street in Eldersburg, Maryland -- Lots 17 and 39 -- to secure repayment of the loan. The deed of trust, however, was not recorded until February 11, 2005, more than a month after the IRS filed notice of its tax lien.
When Restivo Auto Body filed for Chapter 11 bankruptcy protection in April 2011, the IRS filed a proof of claim, stating that Restivo Auto Body owed it $62,438.99 in taxes, interest, and penalties for the relevant
quarters. Susquehanna Bank thereupon commenced an adversary proceeding against the IRS, seeking a declaratory judgment as to the relative priorities of the parties' secured interests, and the parties filed cross-motions for summary judgment. In claiming priority for the deed of trust that it received before the IRS filed its tax lien but recorded thereafter, Susquehanna Bank relied on Md. Code Ann., Real Prop. § 3-201, which relates back a deed of trust's effective date upon recordation to the date when the deed of trust was executed. The Bank also claimed a prior " equitable lien."
The bankruptcy court relied on WC Homes, LLC v. United States, Civil Action No. DKC 2009-1239, 2010 WL 3221845 (D. Md. Aug. 13, 2010), to hold that Md. Code Ann., Real Prop. § 3-201 relates back the effective date of Susquehanna Bank's deed of trust to January 4, 2005, six days before the IRS recorded its tax lien. The court explained:
Why [Susquehanna Bank] would wait so long to record the lien, who knows? But that doesn't really matter for purposes of the analysis. [The] effective date is the most important thing, and the deed was recorded in such a way as . . . give it priority pursuant to [Md. Code Ann., Real Prop. § 3-201] over the government's claim.
The district court affirmed, again relying on WC Homes. The court stated that, under Maryland law, which is made applicable by 26 U.S.C. § 6323(h)(1)(A), " a recorded deed of trust is effective against any creditor of the person who granted the deed of trust as of the date the deed of trust was delivered (not the date it was recorded) regardless of whether the creditor did or did not have notice of the deed of trust at any time." United States v. Susquehanna Bank (In re Restivo Auto Body, Inc.), Civil Action No. ELH-12-3597, 2013 WL 4067624, at *7 (D. Md. Aug. 12, 2013) (quoting Chi. Title Ins. Co. v. Mary B., 190 Md.App. 305, 988 A.2d 1044, 1050 (Md. Ct. Spec. App. 2010)) (internal quotation marks omitted). It concluded accordingly that " as of when the IRS's lien was recorded, Susquehanna's [deed of trust] was already a 'security interest' that was entitled to priority under Maryland law and, hence, federal law." Id. at *6.
As an alternative basis for affirming the bankruptcy court, the district court held that Susquehanna Bank's security interest would have taken priority under Maryland law even if the deed of trust had never been recorded. The court reasoned that Maryland's doctrine of equitable conversion entitles the holder of a deed of trust to the same protections as a bona fide purchaser for value, who takes title free and clear of all subsequent liens regardless of recordation. Since 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," the court concluded that Susquehanna Bank's deed of trust took priority over the IRS's lien.
The IRS filed this appeal.
The priority of a federal tax lien is governed by federal law. See Aquilino v. United States, 363 U.S. 509, 513-14, 80 S.Ct. 1277, 4 L.Ed.2d 1365, 1960-2 C.B. 477 (1960). Under federal law, a lien in favor of the IRS attaches to all property owned by a person who " neglects or refuses" to pay taxes for which he is liable after the IRS demands payment. 26 U.S.C. § 6321. The lien arises at the time the tax assessment is made, id. § 6322, and generally takes priority over a lien created after that date under the common-law principle that " the first in time is the first in right,"
United States v. City of New Britain,
347 U.S. 81, 85, 74 S.Ct. 367, 98 L.Ed. 520 (1954), even if the tax lien is unrecorded, see United States v. Snyder, 149 U.S. 210, 214, 13 S.Ct. 846, 37 L.Ed. 705 (1893). But a tax lien is not " valid as against any . . . holder of a security interest . . . until notice thereof . . . has been filed by the Secretary [of the Treasury]." 26 U.S.C. § 6323(a). As used in § 6323(a), a " security interest" is defined to mean " any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability," id. § 6323(h)(1), and its existence at any given time depends on whether, inter alia, " the ...