Beware of Purchasing Real Estate with Unpaid Liens on It
Can the Internal Revenue Service (“IRS”) collect a prior owner’s delinquent federal income taxes from the subsequent purchaser of real property?
Yes.
In Shirehampton Drive Trust v. JP Morgan Chase Bank, N.A., 2019 WL 4773799 (D.Nev., Sept. 29, 2019) (unpublished decision) (Case No. 2:16-cv-02276-RFB-EJY), the United States District Court for the District of Nevada concluded that the IRS was entitled to enforce its federal income tax liens against the new owner of real property.
The Course of Proceedings in Shirehampton
Plaintiff Shirehampton Drive Trust (“Shirehampton”) sued Defendant, United States of America Treasury Department, Internal Revenue Service (“IRS”), and Defendant, JP Morgan Chase Bank, N.A. (“Chase”), seeking a declaration that from the Court that a Las Vegas property that it had obtained at a foreclosure sale in 2013 was not encumbered by Chase’s deed of trust. To that end, Shirehampton asserted claims for injunctive relief, quiet title, and declaratory relief. The IRS removed the case to federal court, and answered and counterclaimed against Shirehampton, and crossclaimed against Chase and other Defendants, to enforce federal tax liens pursuant to 26 U.S.C. §§ 6321, 6322 and 7401. Chase answered the complaint and asserted counterclaims for quiet title under NRS 40.010, declaratory relief under NRS 30.010 and 28 U.S.C. § 2201, and unjust enrichment. Shirehampton answered the counterclaims, and the Court dismissed the other Defendants without prejudice. All three remaining parties then moved for summary judgment. The Court administratively stayed the case pending the Nevada Supreme Court’s decision in SFR Investments Pool 1, LLC v. Bank of New York Mellon, 134 Nev. 438, 422 P.3d 1248 (2018), but then lifted the stay.
The Facts in Shirehampton
This matter concerned a nonjudicial foreclosure on a property located at 705 Shirehampton Drive, Las Vegas, Nevada 89178 (the “property”). The property was located in a community governed by a homeowners’ association (“HOA”) that required its community members to pay dues.
Louisa Oakenell (“Oakenell”) borrowed funds from MetLife Home Loans, a Division of MetLife Bank, N.A. (“MetLife”) to purchase the property in 2008. To obtain the loan, Oakenell executed a promissory note and a corresponding deed of trust to secure repayment of the note. The deed of trust listed Oakenell as the borrower, MetLife as the lender, and Mortgage Electronic Registration Systems, Inc. (“MERS”), as the beneficiary. In May, 2013, MERS assigned the deed of trust to Chase.
Oakenell fell behind on her HOA payments. The HOA, through its agent Red Rock Financial Services, LLC (“Red Rock”), sent Oakenell a demand letter by certified mail for the collection of unpaid assessments on June 26, 2009. On July 21, 2009, the HOA, through its agent, recorded a notice of delinquent assessment lien. The HOA sent Oakenell a copy of the notice of delinquent assessment lien on July 24, 2009. The HOA subsequently recorded a notice of default and election to sell on October 21, 2009, and then a notice of foreclosure sale on September 18, 2012. Red Rock mailed copies of the notice of default and election to sell to Oakenell, the HOA, the IRS, and Metlife Home Loans. Red Rock did not mail a copy of the notice of default and election to sell to MERS. On January 28, 2013, the HOA held a foreclosure sale on the property under NRS Chapter 116. Shirehampton purchased the property at the foreclosure sale, and a foreclosure deed in favor of Shirehampton was recorded.
In addition to falling behind on her HOA payments, Oakenell also stopped paying federal income taxes. The IRS subsequently filed notices of federal tax liens against Oakenell at the Clark County Recorder’s office on May 1, 2009, and June 24, 2009. As of October 1, 2018, Oakenell had accrued $250,953.37 in income tax liability plus daily compounding interest.
The Decision in Shirehampton
The Court concluded that the IRS was entitled to enforce its federal income tax liens against Shirehampton, the new owner of real property, but that Shirehampton acquired the property free and clear of Chase’s deed of trust.
The Rationale of Shirehampton
Chase Deed of Trust.
The Court first addressed whether Shirehampton purchased the property subject to Chase’s deed of trust, and concluded that it did not.
Chase argued that the foreclosure sale was void because the HOA, through its agent, did not comply with the notice requirements of the version of NRS 107.090 in effect at the time by serving a copy of the notice of default and notice of sale on MERS, its predecessor-in-interest. See, NRS 107.090(3)(b) (requiring that any person recording a notice of default mail a copy of the notice within ten days of recording to “[e]ach other person with an interest whose interest or claimed interest is subordinate to the deed of trust.”). The Court disagreed, and found the facts to be substantially similar to the Nevada Supreme Court’s decision in West Sunset 2050 Trust v. Nationstar Mortgage, LLC, 134 Nev. 352, 354-55, 420 P.3d 1032 (2018) (concluding that “Nationstar’s failure to allege prejudice resulting from defective notice dooms its claim that the defective notice invalidates the HOA sale”).
The Court next considered Chase’s argument that the HOA did not intend to foreclose on the superpriority portion of the lien, because the assessment lien notices did not specify that the sale was a superpriority sale. The Court disagreed, and distinguished the Shirehampton case from the recent decision of the Nevada Supreme Court’s in Cogburn Street Trust v. U.S. Bank, N.A., as Trustee to Wachovia Bank, N.A., 2019 WL 2339538 (decided May 31, 2019) (concluding that HOA properly nonjudicially foreclosed on subpriority portion of lien after bank’s tender satisfied superpriority portion of the lien). The Court concluded that Chase’s evidence was insufficient to find that the HOA intended to foreclose on the subpriority portion of the lien as a matter of law, and did not establish fraud, oppression, or unfairness sufficient to void the sale. In addition, the Court noted that it had previously addressed Chase’s further argument regarding the facial unconstitutionality of NRS Chapter 116, and thus incorporated by reference its reasoning in Carrington Mortgage Services, LLC v. Tapestry at Town Center Homeowners Association, 381 F. Supp. 3d 1289, 1294 (D.Nev. 2019). Thus, the Court finds that Chase’s deed of trust was extinguished by the HOA foreclosure sale.
IRS Tax Lien.
The Court next addressed the priority of the IRS tax lien versus that of the HOA’s lien, and concluded that, because the HOA lien was not perfected at the time that the IRS recorded its notice of tax liens, the IRS tax liens had priority over the HOA lien
The Court initially noted that, when the IRS assesses a person for unpaid federal taxes, a lien is created in favor of the United States as a matter of law, citing, 26 U.S.C. § 6321. While the lien is automatically created when the assessment occurs, the lien is not valid against purchasers, holders of security interests, mechanic’s liens, or judgment lien creditors until notice of it has been filed, citing, 26 U.S.C. § 6323(a). Federal tax liens do not automatically have priority over all other liens. Absent a provision to the contrary, priority for purposes of federal law is governed by the common-law principle that the “the first in time is in the first in right”; and a competing state lien exists for “first in time” purposes when it has been perfected, meaning that the identity of the lienor, the property subject to the lien, and the amount of the lien are established, citing, U.S. v. McDermott, 507 U.S. 447, 449, 113 S.Ct. 1526, 123 L.Ed.2d 128 (1993).
Applying these principles to the Shirehampton case, the Court observed that the IRS first assessed Oakenell for lack of income tax payments on November 7, 2005, and July 3, 2006; and that the IRS then recorded its notice of tax liens with the Clark County recorder on May 1, 2009, and June 24, 2009. The Court further observed that Oakenell first became delinquent on her HOA dues on March 1, 2009; that the HOA recorded its notice of delinquent assessment lien on July 21, 2009; and that the HOA mailed Oakenell a copy of the notice of delinquent assessment lien on July 24, 2009.
Despite these facts, Shirehampton argued that the HOA lien was first in time. Shirehampton claimed that, because the notice of delinquent assessment recorded in July, 2009, incorporated delinquent assessments that had been owed since January, 2009, it was technically first in time. Shirehampton pointed to the language of NRS 116.3116 at the time, which stated that the “association has a lien…from the time the…assessment or fine becomes due.” Oakenell did not become delinquent until March 1, 2009, so Shirehampton argued that the HOA lien was perfected on March 1, 2009. The Court disagreed, and found that the HOA lien was not perfected until the notice of delinquent assessment lien was sent to the unit owner, citing, In re Priest, 712 F.2d 1326, 1329 (9th Cir. 1983) (“[A] lien cannot arise prior to the taking of any administrative steps to establish the lien.”). The Court emphasized that the Nevada Supreme Court has held that the mailing of the notice of delinquent assessment lien to the delinquent homeowner pursuant to NRS 116.31162(1)(a) “institutes proceedings to enforce the lien,” quoting, Saticoy Bay LLC Series 2021 Gray Eagle Way v. JPMorgan Chase Bank, N.A., 388 P.3d 226, 231 (2017) (“A party has instituted ‘proceedings to enforce the lien’ for purposes of NRS 116.3116(6) when it provides the notice of delinquent assessment.”). Thus, the Court stressed that providing notice of delinquent assessment is the first administrative step to perfecting a superpriority lien, because “no action can be taken unless and until the HOA provides a notice of delinquent assessments pursuant to NRS 116.31162(1)(a),” quoting, Saticoy Bay LLC Series 2021, supra, 388 P.3d at 231. The Court pointed out that the notice of delinquent assessment also establishes, pursuant to NRS 116.31162(1)(a), the amount of the lien as is required under federal law before a lien can be perfected, citing, Loanstar Mortgagee Services, LLC v. Barker, 282 Fed.Appx. 572, 573 (9th Cir. 2008). While assessments and related fees may be delinquent prior to this mailing, they are not set until the mailing, citing, NRS 116.31162(1)(a) (explaining that notice must contain a set “amount” for the delinquency). The Court reasoned that the mailing of the notice of delinquent assessment was the first administrative step to establish a superpriority lien, and was the first time that the amount of this lien was fixed and set. Thus, the Court found that an HOA lien cannot be perfected under federal law until at least the notice of delinquent assessment lien has been provided to the unit owner. The Court stated that, it is only with this notice that the identity of the lienor, property subject to the lien, and, most significantly, the amount of the lien are sufficiently established.
Applying these principles to the Shirehampton case, the Court observed that Red Rock sent the notice of delinquent assessment lien pursuant to NRS 116.31162(1)(a) to Oakenell on July 24, 2009, which was after the IRS recorded its notice of tax liens. As such, the Court concluded that, because the HOA lien was not perfected at the time that the IRS recorded its notice of tax liens, the IRS tax liens had priority over the HOA lien, citing, LN Management LLC Series 31 Rue Mediterra v. United States Internal Revenue Service, 729 Fed.Appx. 588 (9th Cir. 2018) (finding no record evidence that identity of HOA lienors, property subject to lien, and amount of lien were established before notice of federal tax lien was recorded). The Court concluded that was IRS was entitled to enforce its tax liens against the new owner of the property, citing, U.S .v. Bess, 357 U.S. 51, 57, 78 S.Ct. 105, 42 L.Ed.2d 1135 (1958) (noting that “[t]he transfer of property subsequent to the attachment of [a federal tax lien] does not affect the lien”).
Thus, the Court held that the IRS could enforce its tax liens against Shirehampton, but that Shirehampton acquired the property free and clear of Chase’s deed of trust.
BRIEF DISCUSSION
This case is fairly straightforward; however, it does illustrate the potential difficulties that may ensue from purchasing real property at a foreclosure sale. Obviously, a purchaser of real property at a foreclosure sale must be careful in doing so, because the IRS potentially can collect the prior owner’s federal income taxes from the subsequent purchaser of the real property.
It should be noted that Shirehampton filed a Notice of Appeal to the Ninth Circuit on November 5, 2019.
CONCLUSION
Under some circumstances, the IRS can collect a prior owner’s delinquent federal income taxes from the subsequent purchaser of real property.
