United States: In Re: Restivo Auto Body, Inc.: 4th Circuit Rules Executed But Unrecorded Security Interest Has Priority Over IRS Tax Lien

Last Updated: November 26 2014
Article by James E. Van Horn and Lauren A. Ford

4th Circuit Rules Executed but Unrecorded Security Interest Has Priority Over IRS Tax Lien

On October 31, 2014, the U.S. Court of Appeals for the 4th Circuit interpreted Maryland law in ruling that a bank's security interest in a Chapter 11 debtor's property created by a deed of trust that was executed before, but recorded after, the Internal Revenue Service filed a tax lien, had priority over the tax lien.


On January 4, 2005, Restivo Auto Body Inc. borrowed $1 million from Susquehanna Bank, and delivered to the bank a deed of trust with respect to two parcels of real property as security for the loan. Six days later, on January 10, 2005, the Internal Revenue Service filed notice of a federal tax lien against Restivo for unpaid employment taxes for the fourth quarter of 2002, the first quarter of 2003, and the first and second quarters of 2004. On February 11, 2005, more than a month after Restivo delivered the deed of trust to the bank, the bank recorded its security interest.

Bankruptcy Court Decision

Restivo filed for Chapter 11 bankruptcy protection in April of 2011 in the U.S. Bankruptcy Court for the District of Maryland. The IRS filed a proof of claim asserting that it was owed $62,438.99 for the unpaid unemployment taxes, interest and penalties. As a result, the bank commenced an adversary proceeding against the IRS seeking a determination of their relative priorities. 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), and on Md. Code Ann., Real Property § 3-201, in holding that the effective date of the bank's security interest related back to the date the deed of trust was executed and therefore gave the bank priority over the IRS. The IRS appealed the decision.

District Court Decision

The U.S. District Court for the District of Maryland, again relying on WC Homes, LLC, and Md. Code Ann., Real Property § 3-201, affirmed the bankruptcy court decision and granted the bank priority over the IRS tax lien.1 The court held that pursuant to Md. Code Ann., Real Property § 3-201, the bank's recordation of its deed of trust on February 11, 2005, related back to the day the deed of trust was executed and delivered. Because the district court held that the recordation related back to the date of delivery, January 4, 2005, this gave the bank priority over the IRS tax lien, which arose on January 10, 2005.

In addition, as an alternative basis for affirming the bankruptcy court, the district court also held that the doctrine of equitable conversion under Maryland state law gave the bank a protected equitable security interest in Restivo's property at the time the deed of trust was executed, and that the bank would have had priority over the IRS tax lien regardless of whether the bank ever recorded its interest.

The IRS filed an appeal.

4th Circuit Court of Appeals Decision

The U.S. Court of Appeals for the 4th Circuit rejected the district court's application of Md. Code Ann., Real Property § 3-201, to determine relative priority positions; however, it affirmed the judgment of the district court under Maryland's doctrine of equitable conversion.2

The court of appeals found that the district court incorrectly applied Md. Code Ann., Real Property § 3-201, in the context of 26 U.S.C. § 6321-23. The court noted that 26 U.S.C. § 6323(a) uses the present perfect tense in providing that 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]," and that the existence of a security interest depends on whether the interest "has become protected under local law" (present perfect tense emphasis added). Therefore, according to the court, the question was whether the bank had a security interest at the time the IRS recorded its tax lien. The court noted that Md. Code Ann., Real Property § 3-101(a), specifies that a deed of trust is not effective unless it is "executed and recorded" and thus under this statute the bank's security interest had not become protected under local law against subsequent judgment liens to deny the IRS priority at the time the tax lien was filed. Accordingly, the court found that the use of the present perfect tense in 26 U.S.C. § 6323(h)(1)(A) precludes giving effect to the relation-back provision in Md. Code Ann., Real Prop. § 3-201, and thus this statute did not operate to give the bank a security interest until the bank recorded its deed of trust and the bank did not have retroactive priority over the IRS tax lien.

The court of appeals nevertheless affirmed and agreed with the district court's ruling that 26 U.S.C. § 6323(h)(1)(A) incorporates Maryland law insofar as it protects equitable security interests against subsequent judgment-creditor liens. The court of appeals found that the Maryland doctrine of equitable conversion applies the principle that "equity treats that as being done which should be done."3 Consistent with this principle, the court of appeals observed that Maryland courts have consistently held that a land purchaser's equitable title is superior to a judgment lien subsequently obtained. In addition, the court of appeals noted that Maryland courts have regularly held that lenders who secure their interests with mortgages or deeds of trust are entitled to the same protections as bona fide purchasers for value. Therefore, when the bank received a conditional deed to secure its loan, it was entitled to the protections available to bona fide purchasers, and as a bona fide purchaser, the bank's equitable interest was superior to a subsequent judgment lienholder as of January 4, 2005.

The IRS tax lien arose pursuant to 26 U.S.C. § 6321, which provides that 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. Pursuant to 26 U.S.C. § 6323(a), a "lien imposed by section 6321 shall not be valid as against ... a holder of a security interest ... until notice thereof ... ." In addition, 26 U.S.C. § 6323(h)(1)(A) holds that a security interest exists at any time "if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation" (emphasis added). The court of appeals noted that under Maryland common law, the bank was protected from subsequent judgment lienholders on the date the deed of trust was delivered and thus the bank had a security interest as defined by 26 U.S.C. § 6323(h)(1)(A) on January 4, 2005. Therefore, pursuant to Maryland common law and 26 U.S.C. § 6323(a), the bank had priority over the IRS tax lien. Additionally, the court of appeals noted that the Maryland doctrine of equitable conversion protects the security interest of a bona fide purchaser against subsequent judgment lienholders regardless of the purchaser's compliance with the recordation statutes, because the recordation statutes protect only bona fide purchasers and not judgment creditors.

While the court of appeals ultimately ruled that the bank's security interest had priority over the IRS tax lien pursuant to Maryland common law, it serves as a good reminder for lenders and other parties obtaining a security interest to record such interest as quickly as possible. Although the holder of a security interest who has the status of a bona fide purchaser (such as the bank in this case) who has not yet recorded may rely upon this decision to maintain priority over a subsequent judgment lien creditor and, as such, an IRS tax lien, bona fide purchasers must still record their interests as soon as possible in order to achieve priority against other bona fide purchasers. Additionally, as a result of this decision, creditors whose liens are subordinated to interests that "have become protected against subsequent judgment lien creditors," must be aware not only of recorded security interests in property, but also unrecorded equitable interests as well.


1. U.S. / I.R.S. v. Susquehanna Bank, No. CIV.A. ELH-12-3597, 2013 WL 4067624 (D. Md. Aug. 12, 2013).

2. In re Restivo Auto Body, Inc., No. 13-2249, 2014 WL 5488166 (4th Cir. Oct. 31, 2014)

3. Id. (quoting 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)).

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