Susquehanna Bank v. United States/Internal Revenue

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-2249
In Re: RESTIVO AUTO BODY, INC., d/b/a Restivo Auto Body &
Towing, Inc.,
Debtor.
------------------------
SUSQUEHANNA BANK,
Plaintiff - Appellee,
v.
UNITED STATES OF AMERICA/INTERNAL REVENUE SERVICE,
Defendant - Appellant.
Appeal from the United States District Court for the District of
Maryland, at Baltimore. Ellen L. Hollander, District Judge.
(1:12-cv-03597-ELH; 11-18718; 11-00734)
Argued: September 16, 2014 Decided: October 31, 2014
Before NIEMEYER, WYNN, and FLOYD, Circuit Judges.
Affirmed by published opinion. Judge Niemeyer wrote the
opinion, in which Judge Floyd joined. Judge Wynn wrote a
separate opinion concurring in part and dissenting in part.
ARGUED: Bethany B. Hauser, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellant. Ian Thomas Valkenet, YOUNG &
VALKENET, Baltimore, Maryland, for Appellee. ON BRIEF: 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.
2
NIEMEYER, Circuit Judge:
In this appeal, we determine priority as between a tax lien
filed by 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
3
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).
4
I
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
5
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
6
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., 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.
7
II
The priority of a federal tax lien is governed by federal
law. See Aquilino v. United States, 363 U.S. 509, 513-14
(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 (1954), even if
the tax lien is unrecorded, see United States v. Snyder,
149 U.S. 210, 214 (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 interest has become
protected under local law against a subsequent judgment lien
arising out of an unsecured obligation,” id. § 6323(h)(1)(A).
8
The issue, in this context, is whether Maryland law gave
Susquehanna Bank a security interest, as defined by
§ 6323(h)(1), when the Bank received a deed of trust to secure
the repayment of its loan on January 4, even though it did not
record the deed of trust until February 11. As the issue is a
question of law, we review the judgment of the district court de
novo.
The IRS contends that the district court misread
§ 6323(h)(1) in applying Md. Code Ann., Real Prop. § 3-201 to
give Susquehanna Bank the retroactive benefit of its late
recordation. In particular, it argues that § 6323(h)(1)
requires the court to determine whether a security interest
existed as of January 10 when the IRS filed its tax lien. And
it notes that under § 6323(h)(1), a security interest only
“exists” at such time as “the interest has become protected
under local law.” Emphasizing the text’s use of the present
perfect tense, it argues that Susquehanna Bank did not obtain an
effective security interest as of January 10, but only as of
February 11, when it recorded the deed of trust. Because
Susquehanna Bank was not a holder of a security interest on
January 10, according to the IRS, the federal tax lien became
valid against the Bank by September 20, 2004, the last date on
which the IRS assessed the tax deficiencies, and therefore the
9
federal tax lien takes priority under the common-law rule of
first in time, first in right.
Susquehanna Bank argues that Maryland’s relation-back
statute is part of the “local law” and must, under
§ 6323(h)(l)(A), be given effect.
Our analysis begins with the determination of when, under
Maryland law, a deed of trust becomes effective against
subsequent judgment liens. See 26 U.S.C. § 6323(h)(1)(A). As a
general proposition, Maryland specifies that a deed of trust is
not effective unless it is “executed and recorded.” Md. Code
Ann., Real Prop. § 3-101(a). When the date of execution is
earlier than the date of recordation, recordation relates back
the deed’s effective date to the date the deed was
executed -- that is,“[e]very deed, when recorded, takes effect
from its effective date,” presumptively defined as the later of
the date of the last acknowledgment or the date stated on the
deed. Id. § 3-201. This means, according to Maryland case law,
that a “recorded deed of trust is effective against any creditor
of the person who granted the deed of trust” -- including a
holder of a judgment lien -- “as of the date the deed of trust
was delivered.” Chi. Title Ins., 988 A.2d at 1050. Thus, where
a deed of trust was executed on July 15, 2005, but remained
unrecorded for over two years, the effective date of the deed of
trust was nonetheless July 15, 2005, giving the deed of trust
10
priority over a lien arising from a judgment rendered after the
execution date but before the recordation date. Id. at 1047-50;
see also, e.g., Angelos v. Md. Cas. Co., 380 A.2d 646, 648 (Md.
Ct. Spec. App. 1977) (holding that a mortgage took priority over
a judgment lien under Real Prop. § 3-201, where the mortgage had
been executed before, but recorded after, the institution of a
lawsuit to obtain the judgment lien).
Thus, under Maryland law, when Susquehanna Bank recorded
its deed of trust on February 11, 2005, the effective date of
the deed of trust related back to January 4, 2005, when it was
executed and delivered.
That conclusion, however, does not dispose of the question
presented in this case, because the question here is not what
interest Susquehanna Bank had on February 11, but rather, under
26 U.S.C. § 6323(a), whether Susquehanna Bank had a “security
interest” at the time the IRS recorded its tax lien on
January 10. Section 6323(h)(1)’s definition of that term
focuses the priority determination on the date when the IRS
filed notice of its tax lien, providing that a security interest
must exist at the time of the IRS’s recordation. In statutory
language, Susquehanna Bank would have priority only “if, at such
time [as the filing of the IRS’s lien, January 10], the property
is in existence and the interest has become protected under
local law against a subsequent judgment lien arising out of an
11
unsecured obligation.” 26 U.S.C. § 6323(h)(1)(A). On
January 10, however, Susquehanna Bank had not yet triggered the
relation-back statute because recordation was an essential
element that had not then been satisfied. See Md. Code Ann.,
Real Prop. § 3-201 (“Every deed, when recorded, takes effect
from its effective date” (emphasis added)); Chi. Title Ins., 988
A.2d at 1050 (“[Real Prop. § 3-201] plainly means that 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” (emphasis added)). While Susquehanna
Bank’s subsequent recordation on February 11 gave its deed of
trust an earlier effective date by operation of Real Prop. § 3-
201, that statute had not yet been triggered as of the date on
which the IRS filed notice of its tax lien. Thus, that statute
had no bearing in determining whether Susquehanna Bank’s
security interest “had become protected” as of January 10.
The district court’s analysis removed § 6323(h)(1)(A)’s
temporal distinction from the statute and rendered the words “at
such time . . . [as] the interest has become protected”
superfluous, notwithstanding the Supreme Court’s guidance to
take account of Congress’ use of verb tenses. See, e.g., United
States v. Wilson, 503 U.S. 329, 333 (1992) (“Congress’ use of a
verb tense is significant in construing statutes”). Tenses are
particularly telling where Congress uses multiple tenses within
12
the same section. See Dickerson v. New Banner Inst., Inc.,
460 U.S. 103, 116 (1983) (deriving meaning from Congress’ use of
the present and present perfect tenses within 18 U.S.C. § 922);
Barrett v. United States, 423 U.S. 212, 217 (1976) (“[Congress]
used the present perfect tense elsewhere in the same
section . . . , in contrast to its use of the present tense
[here]. The statute’s pattern is consistent and no intended
misuse of language or of tense is apparent”).
Thus, we give effect to Congress’ use of the present
perfect tense in § 6323(h)(1)(A), especially since Congress used
the present tense within the same sentence. See § 6323(h)(1)
(“A security interest exists at any time (A) if, at such time,
the property is in existence and the interest has become
protected under local law” (emphasis added)). As a consequence,
§ 6323(h)(1) must be read to mean that at the time that the IRS
filed its lien, a security interest must have been in existence
and must have become protected under local law in order to
obtain priority. Here, that means that as of January 10, 2005,
Susquehanna Bank’s security interest must have become protected
by local law against subsequent judgment liens to deny the IRS
priority. Yet, under Maryland law, as of January 10, Md. Code
Ann., Real Prop. § 3-201 did not give Susquehanna Bank such
protection. That statute did not operate to give Susquehanna
13
Bank a security interest until February 11, 2005, when it
recorded its deed of trust.
The Sixth Circuit’s opinion in Citizens State Bank v.
United States, 932 F.2d 490 (6th Cir. 1991) (per curiam),
provides substantial support for this conclusion. There,
Citizens State Bank recorded a mortgage involving two tracts of
land. Id. at 491. Thereafter, intending to release the
mortgage on one of the tracts, the Bank inadvertently recorded a
total release as to both tracts. Id. The IRS subsequently
recorded a federal tax lien pursuant to 26 U.S.C. § 6321. Id.
The Bank sought priority for its accidentally-released mortgage,
arguing that since it, at some point, had a security interest
that had become protected under local law, its mortgage had
priority under § 6323(a). Id. at 493. Relying on the phrase
“has become” in § 6323(h)(1)(A), the court rejected the Bank’s
interpretation of the statute:
Congress intended the protection to cover present
security interests which have been perfected at some
point prior to the imposition of the federal tax lien.
Thus, the language would exclude security interests
which have not yet become perfected under local law,
as well as those interests which have been
released. . . . [T]he language “has become” suggests
that Congress intended to cover only those security
interests which exist presently, and have become valid
prior to the federal tax lien.
Id. (emphasis added).
14
In short, although Maryland’s relation-back law
retroactively validated Susquehanna Bank’s security interest, it
had not so operated as of January 10, 2005, when the IRS
recorded its tax lien.
This interpretation is precisely the one adopted in Treas.
Reg. § 301.6323(h)-1(a)(2). That regulation provides:
For purposes of this paragraph, a security
interest is deemed to be protected against a
subsequent judgment lien on --
(A) The date on which all actions required under
local law to establish the priority of a
security interest against a judgment lien have
been taken, or
(B) If later, the date on which all required
actions are deemed effective, under local law,
to establish the priority of the security
interest against a judgment lien.
For purposes of this subdivision, the dates described
in (A) and (B) of this subdivision . . . shall be
determined without regard to any rule or principle of
local law which permits the relation back of any
requisite action to a date earlier than the date on
which the action is actually performed.
Treas. Reg. § 301.6323(h)-1(a)(2) (emphasis added).
Susquehanna Bank argues that we should not rely on the
regulation because the statute that the regulation interprets
unambiguously gives effect to local law -- here, Md. Code Ann.,
Real Prop. § 3-201 -- which, it maintains, “protects recorded
security interests from the date of delivery, irrespective of
the date of recordation.” This interpretation, however,
15
overlooks the language of § 6323(h)(1), which, as we have
already pointed out, requires that the evaluation of Susquehanna
Bank’s security interest be made as of the date that notice of
the federal tax lien was filed. Because Susquehanna Bank had
not, as of that date, recorded its deed of trust, the relation-
back provision in Real Prop. § 3-201, which applies only to a
deed “when recorded,” did not yet apply.
Even if Susquehanna Bank’s argument were recognized to
demonstrate a statutory ambiguity, the Treasury Regulation would
nonetheless be enforceable if it were a permissible construction
of the statute. “[A] court need not conclude that the agency
construction was the only one it permissibly could have adopted
to uphold the construction, or even the reading the court would
have reached if the question initially had arisen in the
judicial proceeding.” Chevron, U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 843 n.11 (1984). Instead,
“any ensuing regulation is binding in the courts unless
procedurally defective, arbitrary or capricious in substance, or
manifestly contrary to the statute.” United States v. Mead
Corp., 533 U.S. 218, 227 (2001).
We conclude that the regulation is indeed a permissible
construction of § 6323(h)(1)(A). For the reasons we have
already given above, the present perfect tense used in
§ 6323(h)(1)(A) precludes the subsequent retroactive creation of
16
a security interest. In addition, the legislative history of
the Federal Tax Lien Act of 1966, Pub. L. No. 89-719,
80 Stat. 1125 (codified in scattered sections of 26 U.S.C.),
demonstrates that Congress wanted to bypass state laws that
relate back a deed’s date of priority to an earlier date. The
Senate Report states specifically that “[f]or Federal tax
purposes, a security interest is not considered as existing
until the condition set forth here” -- namely, the requirements
listed in § 6323(h)(1) -- “are met even though local law may
relate a security interest back to an earlier date . . . .”
S. Rep. No. 89-1708, at 13 (1966). And the House Report
expresses the same view:
For purposes of [§ 6323(h)(1)(A)], a security
interest becomes protected against a subsequent
judgment lien on the date on which all actions
required under local law to establish the priority of
the security interest against such a judgment lien
have been taken, or, if later, the date on which all
such actions are deemed effective, under local law, to
establish such priority. Therefore, a security
interest comes into existence only at the time
prescribed in the preceding sentence notwithstanding
any rule or principle of local law which permits the
relation back of any requisite action to a date
earlier than the date on which it is actually
performed.
H.R. Rep. No. 89-1884, at 49 (1966) (emphasis added).
Our conclusion that the Treasury Regulation is a reasonable
construction of 26 U.S.C. § 6323(h)(1)(A) is bolstered by the
fact that federal courts have, with one exception, uniformly
17
applied it to bar state laws that would otherwise permit later
actions to relate back in time, without any suggestion that it
might be an impermissible construction of the statute. See Haas
v. IRS (In re Haas), 31 F.3d 1081, 1091 (11th Cir. 1994)
(holding that, although Alabama state law would give a mortgagee
who erroneously recorded a release of a mortgage an equitable
right to have the mortgage retroactively reinstated,
reinstatement would have resulted in relating back the
perfection of the mortgage to the original recording date, in
violation of Treas. Reg. § 301.6323(h)–1(a)(2)); Flagstar Bank,
FSB v. Eerkes, No. C12-1951RSL, 2014 WL 4384063, at *1-2 (W.D.
Wash. Sept. 4, 2014) (granting reformation of a deed of trust
describing the wrong parcel of land, but holding that the
reformed deed was inferior to a federal tax lien under Treas.
Reg. § 301.6323(h)–1(a)(2)’s prohibition against relation-back
rules); Regions Bank v. United States, No. 3:12-cv-21, 2013 WL
635615, at *3 (E.D. Tenn. Feb. 20, 2013) (reaching same result
as Haas under similar facts); Bank of N.Y. Mellon Trust Co.,
Nat’l Ass’n v. Phipps, Civil No. L-10-1271, 2011 WL 1322393,
at *2-3 (D. Md. Apr. 1, 2011) (assuming that a deed of trust
could be amended to include a mistakenly omitted purchaser or
that an equitable lien could be imposed under state law, but
holding that those remedies could only have forward-looking
effects pursuant to Treas. Reg. § 301.6323(h)–1(a)(2)). But see
18
WC Homes, LLC v. United States, Civil Action No. DKC 2009-1239,
2010 WL 3221845, at *3-4 (D. Md. Aug. 13, 2010) (concluding that
Treas. Reg. § 301.6323(h)–1(a)(2) was not entitled to deference
because the statute was unambiguous).
In short, while we read § 6323(h)(1)(A) unambiguously to
preclude the application of Md. Code Ann., Real Prop. § 3-201,
we also conclude that the Treasury Department’s construction of
§ 6323(h)(1)(A) in explicitly precluding the application of a
relation-back rule is a permissible one. Thus, we find that the
district court misinterpreted § 6323(h)(1)(A) in ruling that
Real Prop. § 3-201 gave Susquehanna Bank a prior security
interest.
III
Apart from its application of Md. Code Ann., Real Prop.
§ 3-201, the district court also concluded that Susquehanna Bank
had a prior security interest under § 6323(h)(1)(A), based on
the Maryland doctrine of equitable conversion. The court
explained that under Maryland law, “the holder of an equitable
title or interest in property, by virtue of an unrecorded
contract of sale, has a claim superior to that of a creditor
obtaining a judgment subsequent to the execution of the
contract.” Susquehanna Bank, 2013 WL 4067624, at *7 (quoting
Stebbins-Anderson Co. v. Bolton, 117 A.2d 908, 910 (Md. 1955))
(internal quotation marks omitted). And it pointed out that the
19
doctrine applies to lenders whose interests are secured by
mortgages or deeds of trust. Construing § 6323(h)(1)(A), the
court concluded that “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’” id. (quoting
§ 6323(h)(1)(A)), and that, under Maryland law, as made
applicable by § 6323(h)(1)(A), judgment liens are “subject to
prior, undisclosed equities,” id. (quoting Wash. Mut. Bank v.
Homan, 974 A.2d 376, 389 (Md. Ct. Spec. App. 2009)) (internal
quotation marks omitted).
We agree with the district court that § 6323(h)(1)(A)
incorporates Maryland law insofar as it protects equitable
security interests against subsequent judgment-creditor liens.
The Maryland doctrine of equitable conversion “emanates
from the maxim that ‘equity treats that as being done which
should be done.’” Noor v. Centreville Bank, 996 A.2d 928, 932
(Md. Ct. Spec. App. 2010) (quoting Himmighoefer v. Medallion
Indus., Inc., 487 A.2d 282, 286 (Md. 1985)). Pursuant to that
doctrine, upon contracting to buy land, “in equity the vendee
becomes the owner of the land, the vendor of the purchase
money.” Id. (quoting Himmighoefer, 487 A.2d at 286). Although
the seller retains legal title during the executory period, he
has “no beneficial interest in the property” apart from his
“right to the balance of the purchase money.” Watson v. Watson,
20
497 A.2d 794, 800 (Md. 1985). Rather, he holds his legal title
“in trust for the purchaser.” Wolf Org., Inc. v. Oles, 705 A.2d
40, 45 (Md. Ct. Spec. App. 1998). By contrast, a holder of
equitable title “retains a significant interest in the
enforcement of a land sales contract.” Wash. Mut. Bank,
974 A.2d at 388. Consistent with these principles, Maryland
courts have repeatedly held that a land purchaser’s equitable
title is superior to any judgment lien subsequently obtained
against the seller. See, e.g., Watson, 497 A.2d at 800; Wolf
Org., 705 A.2d at 46–47. As Maryland’s Court of Appeals
explained in Himmighoefer:
It is a general rule that the holder of an equitable
title or interest in property, by virtue of an
unrecorded contract of sale, has a claim superior to
that of a creditor obtaining judgment subsequent to
the execution of the contract. . . . The right of the
vendee to have the title conveyed upon full compliance
with the contract of purchase is not impaired by the
fact that the vendor, subsequently to the execution of
the contract, incurred a debt upon which judgment was
recovered. A judgment creditor stands in the place of
his debtor, and he can only take the property of his
debtor subject to the equitable charges to which it is
liable in the hands of the debtor at the time of the
rendition of the judgment.
487 A.2d at 287 (quoting Stebbins-Anderson Co., 117 A.2d at 910)
(internal quotation marks and citations omitted). A judgment
creditor’s lien cannot attach to a seller’s bare legal title in
the property after the seller has conveyed equitable title,
because the seller’s legal title is a mere “technicality.” Wolf
21
Org., 705 A.2d at 46. Nor can the judgment creditor’s lien
attach to the seller’s equitable interest in the property,
because that interest has already become “vested in another.”
Id.
Moreover, the Maryland doctrine of equitable conversion
protects the security interest of a purchaser regardless of the
purchaser’s compliance with the recordation statutes. The
recordation statutes protect only bona fide purchasers. See
Lewis v. Rippons, 383 A.2d 676, 680 (Md. 1978) (holding that
because a party was not a bona fide purchaser, “the recording
statute avail[ed] him not”); see also Greenpoint Mortg. Funding,
Inc. v. Schlossberg, 888 A.2d 297, 308 (Md. 2005); In re Careful
Laundry, 104 A.2d 813, 818 (Md. 1954). And Maryland law is
clear that “a judgment creditor is not in the position of a bona
fide purchaser.” Kolker v. Gorn, 67 A.2d 258, 261 (Md. 1949);
see also, e.g., Himmighoefer, 487 A.2d at 287; Stebbins-Anderson
Co., 117 A.2d at 910; Chi. Title Ins., 988 A.2d at 1050; Wash.
Mut. Bank, 974 A.2d at 389; Chambers v. Cardinal, 935 A.2d 502,
511 (Md. Ct. Spec. App. 2007). Thus, a judgment creditor’s
claim “is subject to prior, undisclosed equities” and “must
stand or fall by the real, and not the apparent rights of the
defendant in the judgment.” Kolker, 67 A.2d at 261 (quoting
Ahern v. White, 39 Md. 409, 421 (1874)) (internal quotation
marks omitted).
22
This traditional scheme of real property law and equity
does not render Md. Code Ann., Real Prop. § 3-201’s recordation
requirement a nullity, as the district court recognized. Bona
fide purchasers remain incentivized to record their interests to
achieve priority against other bona fide purchasers. See Md.
Code Ann., Real Prop. § 3-203.
While Susquehanna Bank did not sign a contract to purchase
Restivo Auto Body’s real property, it did receive a conditional
deed to secure repayment of its loan. And Maryland principles
in equity “treat lenders who secure their interests with a
mortgage or deed of trust as entitled to the protections
available to bona fide purchasers for value,” so long as those
lenders act in good faith. Wash. Mut. Bank, 974 A.2d at 396;
see also Silver v. Benson, 177 A.2d 898, 902 (Md. 1962) (“It is
well settled that in circumstances where a deed is set aside for
fraud, a mortgagee not a party to the fraud is entitled to the
protection afforded a bona fide purchaser by a court of equity,
to the extent of his interest”). Consequently, a lender’s
equitable interest in secured property is superior to the
interest of subsequent judgment lienholders. Taylor Elec. Co.,
Inc. v. First Mariner Bank, 992 A.2d 490, 502 (Md. Ct. Spec.
App. 2010) (“The overwhelming weight of authority is that once a
bona fide purchaser or lender for value acquires title by way of
execution of a contract for sale or valid mortgage, the
23
purchaser or mortgagee takes title free and clear of any
subsequent lien” (emphasis added and omitted)).
These principles are not unique to Maryland, which applies
traditional equitable principles to traditional real property
law. See Hellmann v. Circle C Props. I, Ltd., No. 04-03-00217-
CV, 2003 WL 22897220, at *2-3 (Tex. Ct. App. Dec. 10, 2003)
(holding that a lender who held a deed of trust had priority
over a debtor’s subsequent judgment creditor); Suffolk Cnty.
Fed. Sav. & Loan Ass’n v. Geiger, 57 Misc. 2d 184, 186 (N.Y.
Sup. Ct. 1968) (holding that a mortgagee had priority over a
subsequent judgment lienholder).
Applying these principles in this case, Susquehanna Bank
took equitable title to Lots 17 and 39 when Restivo Auto Body
executed a deed of trust and delivered it to the Bank on
January 4, 2005. That equitable title gave Susquehanna Bank
priority over all of Restivo Auto Body’s subsequent judgment-
creditor lienholders. And because federal tax law subordinates
a federal tax lien to a deed of trust that has become protected
“against a subsequent judgment lien arising out of an unsecured
obligation,” 26 U.S.C. § 6323(h)(1)(A), Susquehanna Bank’s
equitable security interest, which had become protected on
24
January 4, 2005, had priority over the IRS’s lien under
§ 6323(a). ∗
The IRS’s arguments to the contrary are unavailing. First,
noting that Maryland’s equitable conversion cases all involve
belatedly recorded deeds, rather than deeds that were never
recorded at all, the IRS argues that those cases “involved the
application of the relation-back principle” of Md. Code Ann.,
Real Prop. § 3-201 and are therefore subject to that statute’s
∗
Dissenting from this part of the opinion, Judge Wynn
argues that the IRS’s tax lien “was not a subsequent lien”
because the IRS’s lien arose “at the time the assessment [was]
made” on September 20, 2004. But that is wholly beside the
point. Equitable conversion protected Susquehanna Bank from
subsequent judgment liens as of January 4, 2005. Because, under
the Tax Code, a security interest “exists” when it “has become
protected under local law against a subsequent judgment lien,”
§ 6323(h)(1)(A) (emphasis added), Susquehanna Bank became the
holder of a security interest as of that date. While the IRS’s
lien became effective against Restivo Auto Body, the delinquent
taxpayer, on September 20, 2004, id. § 6322, it was not valid
against Susquehanna Bank, the holder of a security interest,
until the IRS filed notice of the lien on January 11, 2005, id.
§ 6323(a). This opinion does not overturn United States v.
Bond, 279 F.2d 837 (4th Cir. 1960), which recognized that, in
1913, Congress “partially abrogate[d] the effect of the secret,
unrecorded lien” in § 6323(a) “by requiring recordation of the
federal tax lien to render it valid as against mortgagees,
pledgees, purchasers and judgment creditors.” Id. at 841.
Congress subsequently amended § 6323(a) to make unrecorded tax
liens ineffective against holders of security interests as well.
In short, our argument is not, as Judge Wynn claims, that the
IRS’s tax lien is equivalent to a judgment lien. Rather, the
Tax Code subordinates unrecorded tax liens to security
interests, and it defines security interests according to their
protection under state law against subsequent judgment liens.
See 26 U.S.C. § 6323(h)(1)(A).
25
recordation requirement. This argument, however, overlooks the
fact that Maryland courts have applied the doctrine of equitable
conversion to grant priority to equitable titleholders since
well before the enactment of Real Prop. § 3-201 in 1974. See,
e.g., Stebbins-Anderson Co., 117 A.2d at 910. And cases decided
after 1974 have likewise applied equitable conversion to
subordinate judgment liens to subsequently recorded deeds
without invoking Real Prop. § 3-201, demonstrating that Real
Prop. § 3-201 and equitable conversion are logically
independent. See Himmighoefer, 487 A.2d at 287–88; Grant v.
Kahn, 18 A.3d 91, 96-97 (Md. Ct. Spec. App. 2011). Indeed,
several cases applying equitable conversion make no mention of
the deed’s recordation, indicating that recordation is
irrelevant to the doctrine’s application. See Noor, 996 A.2d
at 938; Wolf Org., 705 A.2d at 45–50. In short, we must accept
the Maryland Court of Appeals at its word when it said that
equitable conversion “does not depend upon actual notice to the
creditor.” Stebbins-Anderson Co., 117 A.2d at 910.
Second, the IRS contends somewhat obliquely that the
district court’s analysis improperly combined an equitable
doctrine with the technical elements of a detailed federal
statutory scheme. A straightforward consideration of the text,
however, puts this argument to rest. Section 6323(h)(1)(A)
defines a “security interest” as an interest that is enforceable
26
against subsequent judgment creditors under local law.
Maryland’s doctrine of equitable conversion is local law, and it
makes Susquehanna Bank’s deed of trust enforceable against
subsequent judgment creditors. Nowhere does § 6323(h)(1)(A)
limit local law to exclude established principles of state
common law. Moreover, federal courts have often invoked
equitable principles of state law when applying § 6323(h)(1)(A).
See Haas, 31 F.3d at 1091 (holding that state equitable
principles would retroactively reinstate an erroneously released
mortgage but that those principles were nonetheless barred by
Treas. Reg. § 301.6323(h)-1(a)(2)’s prohibition against relation
back); Regions Bank, 2013 WL 635615, at *2-3 (same); Bank of
N.Y. Mellon Trust, 2011 WL 1322393, at *2–3 (assuming arguendo
that state equitable principles would retroactively impose an
equitable mortgage where a deed of trust accidentally omitted
the name of a purchaser, but holding that those principles were
barred by Treas. Reg. § 301.6323(h)-1(a)(2)).
Pointing to Angelos v. Maryland Casualty Co., the IRS
responds that Maryland’s own courts do not combine the doctrine
of equitable conversion with the technical elements of
§ 6323(h)(1)(A) when determining priority of a lien relative to
a competing federal tax lien. In Angelos, the IRS intervened in
a dispute over lien priority between a judgment creditor and
Angelos, the holder of a third mortgage, asserting that its tax
27
liens deserved priority over the judgment creditor’s lien.
380 A.2d at 647. While the factual record was insufficient to
decide conclusively the IRS’s priority, the court endeavored to
guide the lower court on remand. Id. at 649–50. It noted that
the IRS had conceded that its tax lien was subordinate to
Angelos’ lien because the tax lien “came not only after Angelos’
mortgage was executed, but after it was recorded as well.” Id.
at 650. Far from rejecting application of the doctrine of
equitable conversion in determining tax lien priority, the court
in Angelos had no need to consider the doctrine in light of the
IRS’s admission that Angelos’ lien was entitled to priority.
Even if the IRS had not conceded its inferior lien position, Md.
Code Ann., Real Prop. § 3-201 would have afforded Angelos
priority because Angelos’ mortgage was recorded before the IRS
filed notice of its tax lien, making reliance on equitable
conversion unnecessary and, in the circumstances, irrelevant.
Third, the IRS maintains that Susquehanna Bank does not
qualify as a statutory purchaser entitled to priority under
26 U.S.C. § 6323(a). Section 6323(h)(6) defines “purchaser” as
“a person who, for adequate and full consideration in money or
money’s worth, acquires an interest (other than a lien or
security interest) in property which is valid under local law
against subsequent purchasers without actual notice.” Under
Maryland law, until recordation, a purchaser’s property interest
28
“is subject to destruction by a conveyance of the legal title to
a bona fide purchaser without notice.” Bourke v. Krick,
304 F.2d 501, 504 (4th Cir. 1962). Since Susquehanna Bank had
not yet recorded its property interest when the IRS filed notice
of its federal tax lien, the IRS contends that Susquehanna
Bank’s property interest was not “valid under local law against
subsequent purchasers without actual notice.” Although the IRS
may be correct that Susquehanna Bank was not a statutory
purchaser, that point is wholly beside the point. Maryland’s
doctrine of equitable conversion does not transform lenders into
purchasers. Rather, it “entitle[s] [lenders] to the protection
afforded” by Maryland law to bona fide purchasers. Silver,
177 A.2d at 902. As a lender secured by a deed of trust,
Susquehanna Bank acquired equitable title on January 4, 2005,
when Restivo Auto Body executed the deed of trust, giving the
Bank priority over any subsequent judgment liens obtained
against Restivo Auto Body. As such, on January 4, Susquehanna
Bank had a security interest, as defined in § 6323(h)(1), giving
it priority over the IRS’s later-recorded tax lien, pursuant to
§ 6323(a).
Fourth, the IRS contends that a party cannot convey an
interest in property that it does not have. It notes that its
tax lien attached to Restivo Auto Body’s property on or before
September 20, 2004, when the tax deficiencies were assessed.
29
See 26 U.S.C. § 6322. Therefore, it maintains that Restivo Auto
Body’s property was already encumbered when it executed a deed
of trust to Susquehanna Bank on January 4, 2005, precluding
Restivo Auto Body from conveying an unencumbered interest in
Lots 17 and 39. This argument is a red herring. It is all too
common that a property holder fraudulently conveys the same
interest in his property to various parties. Even though the
property holder does not hold an unencumbered interest when
conveying that interest to a second purchaser or mortgagee,
property law often places title in fee simple in the second
purchaser or mortgagee as long as it obtained its interest in
good faith. For example, under Maryland’s race-notice statute,
a second bona fide purchaser who beats the first bona fide
purchaser in the race to record takes good title to the
property. Md. Code Ann., Real Prop. § 3-203. Section 6323(a)
is no different. Where a delinquent taxpayer executes a deed of
trust to a lender after a federal tax lien has attached to the
same property but before the IRS has filed notice thereof,
priority vests in the holder of the security interest created by
the deed of trust.
Finally, the IRS insists that applying the equitable
principles of Maryland law would ignore the Supreme Court’s
effort to interpret federal tax laws in such a manner as not to
place the collection of taxes, and thereby “the potential
30
existence of the government of the United States[,] . . . at the
mercy of state legislation.” Snyder, 149 U.S. at 214. But
federal tax laws, namely 26 U.S.C. § 6323(h)(1)(A), mandate that
result with respect to tax lien priority by expressly
incorporating local law into the definition of “security
interest.” As we stated in Collier v. United States (In re
Charco, Inc.), 432 F.3d 300 (4th Cir. 2005), “[a]lthough
Congress could have retained absolute priority under the common
law ‘first in time, first in right’ rule, it was satisfied [in
§ 6323] to have the IRS be treated no better and no worse than
other third-party lienors under state law.” Id. at 306
(emphasis added and omitted). Congress remains free to amend
§ 6323 to make federal tax collection less susceptible to state
law doctrines if it fears that the incorporation of local law
may imperil the federal fisc. But we must take § 6323 as it now
reads.
For the reasons given, we affirm the judgment of the
district court.
AFFIRMED
31
WYNN, Circuit Judge, concurring in part and dissenting in part:
I join in Parts I and II of the majority opinion. However,
I cannot join in Part III, which holds that Susquehanna Bank’s
interest in Restivo Auto Body’s land is protected by equitable
conversion. I would reverse the district court and hold that
Susquehanna Bank has no interest sufficient to defeat the IRS’s
tax lien on the land. Accordingly, I respectfully dissent.
I.
As the majority recognizes, the priority of federal tax
liens is governed by federal law. Supra at 8 (citing Aquilino
v. United States, 363 U.S. 509, 513-14 (1960)). Federal law
makes it clear that Restivo Auto Body did not have an
unencumbered title to which it could give Susquehanna Bank an
interest.
Specifically, under the Internal Revenue Code, the type of
tax lien at issue here “shall arise at the time the assessment
is made and shall continue until the liability for the amount so
assessed . . . is satisfied[.]” 26 U.S.C. Section 6322
(emphasis added). This Court has held that for such a lien to
become “valid and effective . . . notice, filing or recording
are not required.” United States v. Bond, 279 F.2d 837, 841
(4th Cir. 1960).
32
Here, no one disputes that the IRS assessed the tax
deficiencies on September 20, 2004. From that date forward,
then, the property was encumbered by the IRS tax lien. And it
would be over three months before Susquehanna Bank even entered
the picture. Despite what the majority argues in its footnote
at supra at 25, this is precisely the point. The majority
applies state law to determine the priority of the IRS's tax
lien to the property. It does so by blurring the line between
the IRS and a judgment creditor and between a tax lien and a
judgment lien without citing any precedent that allows it to do
so. See supra at 20 (“We agree with the district court that
Section 6323(h)(1)(A) incorporates Maryland law insofar as it
protects equitable security interests against subsequent
judgment-creditor liens” (this begs the question as to what the
“subsequent judgment-creditor lien” is if not the tax lien));
supra at 22 (“The recordation statutes protect only bona fide
purchasers. . . . And Maryland law is clear that ‘a judgment
creditor is not in the position of a bona fide purchaser.’”
(again, who is the “judgment creditor” if not the IRS?)).
Based on this blurred understanding, it then applies
Maryland equitable principles to declare that Susquehanna Bank's
interest is superior to a subsequent judgment lien. While the
majority may be right in its interpretation of Maryland’s
equitable principles, it is wrong in applying them to this case.
33
There is no judgment lien here. There is a tax lien. And its
priority in this scheme is determined solely by federal law.
This Court has made it clear that filing is not necessary
for a tax lien to become effective, Bond, 279 F.2d at 841, and
the majority does not claim to be overturning this binding
precedent. Therefore the IRS’s tax lien was “valid and
effective” as of September 20, 2004, well before Susquehanna
Bank had any security interest. In fact, in Ruggerio v. United
States, 153 Fed. Appx. 242 (4th Cir. 2005) (unpublished),
another panel of this Court analyzed Maryland’s equitable
conversion principle as it related to granting priority to a
mortgage holder over a federal tax lien. In that case, this
Court stated that:
We have noted that “the Maryland law is that legal
title to land does not pass until a deed is properly
executed and recorded, and . . . until this is done a
vendee's equity in property is subject to destruction
by a conveyance of the legal title to a bona fide
purchaser without notice.” Hence, under Maryland law,
Ruggerio's [the mortgage holder] interest in the
Property would be invalid against subsequent
purchasers without notice. Because Ruggerio's
interest in the Property was subject to destruction
under Maryland law by subsequent purchasers without
actual notice, he did not qualify as a “purchaser”
under Section 6323(b) of the IRC before April 7, 2003
[the date IRS gave notice of its tax lien]. Thus, the
federal tax liens on the Property remain valid against
Ruggerio.
34
Id. at 244-45 (citations omitted). Further, the Court in
Ruggerio added in a footnote, “To the extent that Ruggerio may
have achieved ‘purchaser’ status after April 7, 2003, the
federal tax liens on the Property remain valid against him based
on the antecedent filing of tax notices.” Id. at 245 fn (citing
26 U.S.C. Section 6323(a)). It thus held that the mortgage
holder did not have priority over the federal tax lien, even
though notice was given after the mortgage was conveyed.
As the majority opinion notes, Maryland’s equitable
conversion doctrine protects “a land purchaser’s equitable
title” as “superior to any judgment lien subsequently obtained
against the seller.” Supra at 21 (citing Watson v. Watson, 497
A.2d 794, 800 (Md. 1985)) (emphasis added). * But the IRS’s
interest here predates that of Susquehanna Bank. The IRS filed
notice of its lien subsequent to Susquehanna Bank’s loan—but the
interest itself arose and became protected at an earlier date.
It therefore was not a subsequent lien. And because the IRS’s
interest is not a subsequent lien, the principles the majority
*
The Appellee’s brief before this Court barely addresses
this alternative holding of the district court. In fact, their
brief only discusses the concept of “equitable conversion” by
quoting from Stebbins-Anderson Co. v. Bolton, 208 Md. 183, 187-
88 (1955), to support their argument for application of
Maryland’s relation back principle, which this Court rejects in
Part II of the majority’s opinion.
35
cites about protecting purchasers or other interest holders
against “subsequent judgment liens” are beside the point.
II.
This case should be governed by the priority principle of
“first in time is first in right.” United States v. City of New
Britain, 347 U.S. 81, 85 (1954). Here, the IRS’s interest in
the property attached on September 20, 2004. The earliest
possible date, even under equitable theories, that Susquehanna
Bank’s interest could have attached is January 4, 2005. The IRS
therefore had an interest in the land a full 106 days prior to
Susquehanna Bank’s earliest potential date of possessing an
interest. It thus has the first right to the land to fulfill
Restivo Auto Body’s tax obligations. Accordingly, I
respectfully dissent as to Part III and the final judgment.
36