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Condo | HOA Lawyers

Your Condo Lien can be Prior to a Federal Tax Lien if you File it Correctly, Timely & for the Full Amount Due

Summary

The United States District Court held that a prior recorded condominium lien had priority over a federal tax lien but only to the extent of the amount stated in the lien notice. SO make sure you get everything you should in your lien filing.

I want to thank attorney William Z. Kolobaric and Hirzel Law, PLC in Michigan for bringing this case to my attention and for allowing me to reprint large portions of their blog on this subject.

The Facts

Defendant Pamela Norwood (“Norwood”) bought a condominium unit in March 2015 in the Yarmouth Commons Condominium project (“Condominium Unit”).  On April 6, 2015, the IRS made an assessment of past due income taxes against Norwood for the 2009 tax year she failed to pay but it was not until February 8, 2016 that the IRS recorded a Notice of Federal Tax Lien with the Macomb County Register of Deeds against Norwood’s property in Macomb County, which included the Condominium Unit.  About 10 days earlier, on January 28, 2016, Yarmouth Commons Association (“Association”) recorded a notice of lien with the Macomb County Register of Deeds in the amount of $1,490.00 for unpaid assessments, exclusive of interest, costs, attorney fees and any future assessments which may become due.

The Association and the IRS argued over whose lien had priority. The Association filed suit in the Macomb County Circuit Court against the IRS and others.  The IRS removed the case to the United States Eastern District of Michigan and filed a counterclaim against the Association and a crossclaim against Norwood for payment of the delinquent income taxes.

Norwood failed to respond to the Association’s complaint and the IRS was granted a default judgment on its crossclaim. Thereafter, the Association and the IRS filed cross motions for summary judgment with the Association arguing that it had priority over the IRS tax lien pursuant to federal law.

District Court Decision – Association’s Lien was a Perfected Security Interest

The District Court found that the general rule is that a “federal tax lien need not be filed to gain priority over other interests; it is perfected at the time the lien is assessed.” In re Terwilliger’s Catering Plus, Inc., 911 F.2d 1168, 1176 (6th Cir. 1990) (citing 26 U.S.C. § 6322).  The District Court though also found that the Internal Revenue Code (“IRC”) creates an exception to the general rule whereby a tax lien “shall not be valid as against any purchaser, holder of a security interest, mechanic’s lien or, or judgment lien creditor until notice thereof … has been filed by the Secretary.” Yarmouth, 299 F.Supp.3d at 866-67 (citing 26 U.S.C. § 6323 (a) (emphasis added)).

The District Court carefully examined the definition of a security interest under 26 U.S.C. § 6323 (h) and stated that Courts have agreed that a creditor relying on the security interest exception “must establish that its interest satisfies four conditions: (1) that the security interest was acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss; (2) that the property to which the security interest was to attach was in existence at the time the tax lien was filed; (3) that the security interest was, at the time of the tax lien filing, protected under state law against a judgment lien arising out of an unsecured obligation; and (4) that the holder of the security interest parted with money or money’s worth.” Yarmouth, 299 F.Supp.3d at 867 (citing Litton Indus. Automation Sys., Inc. v Nationwide Power Corp., 106 F.3d 366, 368 (11th Cir. 1997) (quoting Haas v. Internal Revenue Serv. (In re Haas), 31 F.3d 1081, 1085 (11th Cir. 1994)).

After an exhaustive analysis the Court found that the Association had satisfied the four conditions of the security interest exception and held that the Association’s lien was entitled priority over the IRS lien, to the extent of the amount set forth in the notice of lien.

Lessons Learned
  1. Condominium associations are frequently faced with federal tax lien priority claims when trying to collect or proceed with foreclosure of their lien;
  2. Yarmouth Commons Ass’n v. Norwood demonstrates the importance of timely recording liens on delinquent owners and having the correct amount of the lien; and
  3. If you are not sure if your collection policy or documents fully protect your association, be certain to have both reviewed by an experienced association attorney.

Yarmouth Commons Ass’n v. Norwood, et. al., 299 F. Supp 862 (E.D. Mich., 2017)

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