Can a recorded tax lien be recognized as a mortgage lien?

Tax Lien

State, Dep’t of Taxation v. Kawahara (Nev. Supreme Ct. – June 25, 2015)

The United States Bankruptcy Court for the District of Nevada certified two questions to the Nevada Supreme Court concerning the priority of two competing liens on the proceeds of a property sale. The first question asked whether a Certificates of Tax Lien has the effect and priority of a nonconsensual judgment lien or the effect and priority of a consensual mortgage lien. The second asked which lien has priority over the proceeds of a 2012 property sale: a 2009 deed of trust, first recorded in 2011, or a tax lien, created and recorded in 2010.

The Kawaharas loaned the Allisons $400,000. The Allisons executed a note to the Kawaharas in that amount secured by a deed of trust on a Reno property. In July 2009, the note was delivered to the Kawaharas. Although all parties believed the deed of trust had been recorded at that time, it was not recorded until February 2011.

The Allisons owned Allison Automotive Group, Inc., a car dealership in Reno. The dealership became delinquent in taxes owed to the Nevada Department of Taxation (Department). It submitted a signed payment agreement to the Department, which obligated the dealership to pay $438,044.68 pursuant to a payment schedule. In connection with that submission, the Allisons personally guaranteed payment to the Department. In December 2010, the Department recorded certificates of tax lien against the Allisons.

The Allisons filed for bankruptcy in November 2011. As part of the administration of the bankruptcy estate, the bankruptcy court approved the sale of the Reno property with liens attaching to the sale proceeds in the order of their priority. The bankruptcy court’s certified questions concerned the dispute between the Kawaharas and the Department over the priority of their respective liens on the Reno property and, more directly, which party was entitled to be repaid first from the $482,000 in remaining proceeds from the property’s sale.

To record a mortgage or real property lien in Nevada, NRS 111.312(1) requires that the filed document contain certain formalities, including the grantee’s address and the conveyed parcel’s county-assigned number. In contrast, to record a tax lien, NRS 360.473(1) provides that the Department may simply file a certificate of delinquency setting forth (1) the amount due, (2) the name and address of the debtor, and (3) the Department’s statement that it has complied with all procedures required by law.

The Nevada Supreme Court explained that in this case, the Department filed a tax lien, not a mortgage. The bankruptcy court stated that the Department filed a tax lien certificate. The bankruptcy court’s finding was supported by the record, which showed that the Department’s filings refer to tax statutes and did not include parcel numbers.

The Department requested that the Court give the certificates of tax lien the effect and priority of a mortgage. But, the Court reasoned that it would defeat the purpose of a centralized recording system if the law protected people who filed the wrong liens. Here, the Department filed certificates of tax lien, not a mortgage or any instrument that fulfilled the formalities of a mortgage lien. Third parties reviewing the public records would not see a mortgage on the property, but only a tax lien with the Allisons’ address. The Department further argued that their interest arose from a guarantee, not by operation of law, and therefore could not legally be a tax lien. The Court explained that may be true, but then the Department should not have recorded tax lien certificates. Thus, the Court concluded the Department’s filings have the effect and priority of exactly what they recorded: tax liens. Because the Department’s tax lien was given the effect of a judgment lien, the Court determined the Department was not protected by Nevada’s recording statutes.

Because Nevada’s recording statutes did not protect the Department against unrecorded conveyances, the rule applicable to this case was the common law rule of “first in time, first in right.” The Kawaharas’ deed of trust was valid and attached in 2009, when their interest was created. The Department’s tax lien certificates were filed, and thereby attached, in 2010. Therefore, the Court concluded the Kawaharas’ deed of trust had priority over the Department’s tax lien.

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