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The U.S. Court of Appeals for the Fourth Circuit, on Oct. 31, 2014, held in a split decision that a lender's unrecorded lien primed an earlier unrecorded federal tax lien on a Chapter 11 debtor's real property. In re Restivo Auto Body, Inc., 2014 WL 5488166 (4th Cir. Oct. 31, 2014) (2-1). Relying on “Maryland['s] common law ' doctrine of equitable conversion,” the court reasoned that the lender was entitled “to the same protections as a [good faith] purchaser for value who takes title free and clear of all subsequent liens regardless of recordation.” Id. at *2. The dissent, however, argued that federal law governs “the priority of federal tax liens”; the debtor taxpayer had no “unencumbered title to ' give” the lender; and that the majority erred by applying “state law to determine the priority of the IRS's tax lien to the property,” an issue to be “determined solely by federal law.” Id. The Restivo case reassures secured lenders unaware of a borrower's preexisting tax lien, however, as it protects them against the government's nondisclosure.
Relevance of the Case
To protect itself against competing lienors, such as federal tax liens, a secured lender will promptly record its security interest as soon as its borrower signs a security agreement or mortgage. Any delay in recording may enable an intervening secured lender, judgment creditor or bankruptcy trustee to prime the earlier lender. In Restivo, however, the lender inexplicably delayed recording its lien by five weeks and was still able to prime the intervening recorded federal tax lien that had arisen months before the lender made the secured loan.
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