UNITED STATES OF AMERICA / INTERNAL REVENUE SERVICE, Appellant,
SUSQUEHANNA BANK, Appellee. In re RESTIVO AUTO BODY, INC., Debtor. Adversary Nos. 11-734, 11-18718
Ellen Lipton Hollander United States District Judge
The United States of America/Internal Revenue Service (“IRS”), appellant, appeals the grant of summary judgment by the United States Bankruptcy Court for the District of Maryland in favor of Susquehanna Bank (“Susquehanna”), appellee. The IRS and Susquehanna dispute which party has priority over the proceeds from the sale of certain real property owned by Restivo Auto Body, Inc. (“Restivo”), the debtor in an underlying Chapter 11 bankruptcy proceeding.
In January 2005, Restivo borrowed approximately $1 million from Susquehanna and, as security for the loan, executed and delivered to Susquehanna an indemnity deed of trust in two parcels of real property owned by Restivo in Eldersburg, Maryland, one of which was improved and the other of which was unimproved. After Restivo delivered the deed of trust to Susquehanna, but before Susquehanna recorded the deed in the Land Records of Carroll County, the IRS filed a Notice of Federal Tax Lien against all property and rights to property owned by Restivo, due to unpaid employment taxes.
In Restivo’s subsequent bankruptcy proceeding, the Bankruptcy Court issued an order authorizing the sale of the unimproved property (hereafter, the “Property”), and Susquehanna initiated an adversary proceeding to determine the priority of its interest in the Property vis-à-vis the priority of the IRS’s interest. Susquehanna and the IRS filed cross-motions for summary judgment, and the Bankruptcy Court ruled in favor of Susquehanna. The IRS noted this appeal, which has been fully briefed. For the reasons that follow, I will affirm the judgment of the Bankruptcy Court.
Restivo owned two pieces of real property: Lot 17 and Lot 39, Enterprise Street, Eldersburg, Maryland. See ECF 1-15 and ECF 1-16 (purchase deeds). Lot 39, which was unimproved, is the Property at issue here. On January 4, 2005, Susquehanna disbursed to Restivo a loan in the amount of $1, 006, 065.72. See ECF 1-25 (affidavit of Susquehanna Bank vice president). On the same day, Restivo executed and delivered to Susquehanna an indemnity deed of trust (“IDOT”) to the two properties, securing its promise to repay the loan. See ECF 1-17 (IDOT).
Days later, on January 10, 2005, the IRS filed in the Circuit Court for Carroll County a Notice of Federal Tax Lien against Restivo in the amount of $147, 392.84. See ECF 1-18 at 7 (Notice of Federal Tax Lien). The tax lien was based on Restivo’s failure, beginning in the fourth quarter of 2002 and continuing through the second quarter of 2004, to pay its quarterly employment taxes. See ECF 1-18 at 2 (affidavit of IRS Insolvency Unit Specialist).
Susquehanna recorded the IDOT in the Land Records of Carroll County on February 11, 2005, one month and one day after the IRS recorded its lien. See IDOT at 8.
As noted, Lot 39 was sold following the order of the Bankruptcy Court. However, the proceeds of the sale were held in escrow pending the outcome of proceedings in the Bankruptcy Court. Susquehanna initiated an adversary proceeding, claiming priority over the proceeds of the sale of Lot 39. Relying on a decision by Chief Judge Deborah K. Chasanow in WC Homes, LLC v. United States, Civ. No. DKC-09-1239, 2010 WL 1141204 (D. Md. Mar. 22, 2010), reconsideration denied, 2010 WL 3221845 (D. Md. Aug. 13, 2010), the Bankruptcy Court held that Susquehanna had priority over the proceeds of the ordered sale. The court reasoned that although Susquehanna recorded after the IRS, the federal statute that governs tax lien priority, 26 U.S.C. § 6323, incorporates local law (Maryland law in this case) to determine whether a security interest has been perfected and that, under Maryland law, the effective date of the IDOT was the date of delivery to Susquehanna, January 4, 2005, not the date of recordation, February 11, 2005. Thus, the Bankruptcy Court concluded that, under Maryland law, Susquehanna’s interest was entitled to priority when the IRS recorded its Notice of Federal Tax Lien on January 10, 2005.
Pursuant to Fed.R.Bankr.P. 8013, a federal district court reviews a bankruptcy court’s conclusions of law de novo. See In re Official Comm. of Unsecured Creditors for Dornier Aviation (N. Am.), Inc., 453 F.3d 225, 231 (4th Cir. 2006) (“We review the bankruptcy court’s legal determinations de novo and its factual findings for clear error.”).
The IRS’s federal tax lien was established pursuant to 26 U.S.C. § 6321, which provides:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
“The priority of federal tax liens as against competing liens asserted against a taxpayer’s property is governed by federal law.” In re Charco, Inc., 432 F.3d 300, 304 (4th Cir. 2005) (citing Aquilino v. United States, 363 U.S. 509, 514 (1960)). But, “Federal tax liens do not automatically have priority over all other liens.” United States ex rel. IRS v. McDermott, 507 U.S. 447, 449 (1993). Of import here, 26 U.S.C. § 6323(a) states:
The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic’s lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary. (Emphasis added.)
Thus, as to a purchaser, mechanic’s lienor, judgment lien creditor, or—as in this case—a holder of a “security interest, ” federal law “deem[s] the United States’ lien to have commenced no sooner than the filing of notice” that complies with 26 U.S.C. § 6323(f). McDermott, 507 U.S. at 449. Subsection (f) provides that notice of a federal tax lien must be filed “in the case of real property, in one office within the State (or the county, or other governmental subdivision), as ...