Opinion ID: 675099
Heading Depth: 3
Heading Rank: 4

Heading: Robert

Text: 89 The relative priority of Robert's security interest, unlike that of Mary and Kelly, turns exclusively on whether he is entitled to invoke the protection of section 6323, the federal statute governing the relative priority of federal tax liens against the interests of subsequent purchasers and holders of security interests. In concluding that he was not so entitled, the magistrate judge found that Robert was not protected under 26 U.S.C. Sec. 6323(b)(1) as a purchaser or holder of a security interest because he failed to sustain his burden of showing that he 'did not have actual notice or knowledge of the existence of such [tax] lien[s],' for the same reasons that he failed to show lack of knowledge of the fraudulent conveyance of September 15, 1982. 826 F.Supp. at 1500 (alteration in original) (emphasis added) (citation omitted). Appellants contend, however, that Robert primarily qualifies for protection under 26 U.S.C. Sec. 6323(a), not (b)(1), for which actual notice or knowledge of the tax lien is irrelevant. 5 As such, appellants insist that Robert's status under the statute is identical to that of Mary and Kelly and thus whether Robert is entitled to invoke section 6323(a) turns on whether he, like Mary and Kelly, was on record notice of the tax liens. Because the magistrate judge correctly found that the 1982 tax lien was recorded outside the chain of title under New York law, appellants conclude that the government ran afoul of the notice requirements under section 6323(f) with respect to Robert, a subsequent purchaser, as it had with Mary and Kelly and, thus, Robert was entitled to priority over the 1982 tax lien pursuant to section 6323(a). We agree. 90 The statute makes clear that a holder of a security interest, in addition to a purchaser, comes within the protection of 26 U.S.C. Sec. 6323(a). A security interest under the statute is defined as: 91 [A]ny interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth. 92 26 U.S.C. Sec. 6323(h)(1). It is undisputed that Robert holds a security interest in the Property by virtue of his mortgage for $53,000. Thus, the same notice requirements under section 6323(f)(4) that apply to purchasers, in this case Mary and Kelly, apply to Robert, a mortgagee of the Property. See, e.g., United States v. Carson, 741 F.Supp. 92, 94-95 (E.D.Pa.1990) (For the United States to prevail over a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor, a notice of the federal tax lien must be on file.). 93 After reviewing the case law, as well as the plain language and legislative history of section 6323, we are satisfied that record notice, as opposed to actual knowledge, of the tax lien is required to deprive a person of section 6323(a)'s protection. See, e.g., TKB Int'l v. United States, 995 F.2d 1460, 1465-66 (9th Cir.1993) (where federal tax liens are recorded outside the subsequent purchaser's chain of title, the liens are not valid against a subsequent purchaser who had actual notice of their existence prior to purchase); United States v. Beaver Run Coal Co., 99 F.2d 610, 613 (3d Cir.1938). Had Congress intended that actual knowledge be required under section 6323(a), it would have expressly said so as it did under subsection (b)(1). Cf. 26 U.S.C. Sec. 6323(b)(1)(A), (B); see also TKB Int'l, 995 F.2d at 1466 n. 4 (citing S.Rep. No. 1622, 83rd Cong., 2nd Sess. 5224 (1954), U.S.Code Cong. & Admin. News 1954, pp. 4017 (deleting provision proposed by the House of Representatives to limit section 6323 to qualified persons who take without actual knowledge); H.R.Conf. Rep. No. 2543, 83rd Cong., 2nd Sess. 78 (1954) (House recedes from Senate's deletion)). Thus, the mere finding that Robert failed to sustain his burden of showing that he 'did not have actual notice or knowledge of the existence of such [tax] lien[s] '  cannot deprive him of the statute's protection. 826 F.Supp. at 1500 (alteration in original) (emphasis added) (quoting 26 U.S.C. Sec. 6323(b)(1)(A)). 94 Applying the statute to Robert, it is undisputed that Robert was deprived of the required record notice. Indeed, the magistrate judge's conclusion that the government failed to provide record notice to the current purchasers of record, Mary and Kelly, is dispositive of the government's failure properly to notice Robert, a subsequent holder of a security interest in the Property. See 826 F.Supp. at 1494. Nor does the record contain any evidence that Robert had actual notice of the tax liens. Thus, although Robert recorded his mortgage after the recording of the 1982 tax lien, that lien was recorded outside the chain of title and runs afoul of the notice requirements set forth in section 6323(f)(4), thereby triggering the protection of subsection (a). 95 This conclusion, as long as there was no record notice, however, does not end our inquiry. Although neither party has raised the issue, at least one circuit has intimated that evidence of actual knowledge of a fraudulent conveyance by a subsequent purchaser would render the result in this case ... 'very different.'  TKB Int'l, 995 F.2d at 1465 n. 4 (citation omitted). The TKB Court, moreover, suggests that a subsequent purchaser has a duty to look beyond the index and search the documents that are in the actual chain of title  'as may have a current effect and must then act on the notice imparted.'  Id. at 1465 (citation omitted). Indeed, the TKB Court would have us look at recorded land records such as the deed in this case to determine whether Robert was put on notice that the transfer actually was fraudulent and involved no consideration. Id. In short, TKB appears to read a limited good faith requirement into section 6323(a) not as to a person's knowledge of federal tax liens, but as to the person's actual knowledge of a fraudulent conveyance. See id. at 1465 n. 3. 96 Of interest here is the magistrate judge's finding that Robert failed to sustain his burden that he lacked actual knowledge of the federal tax liens for the same reasons that he failed to show lack of knowledge of the fraudulent conveyance of September 15, 1982. 826 F.Supp. at 1500. Accordingly, Robert's status under section 6323(a) raises two additional issues in this case: (1) whether Congress intended that a mortgagee's actual knowledge of a fraudulent conveyance bars that person from relying on section 6323(a)'s notice protection; and if so, (2) whether sufficient evidence existed to support a finding that Robert had actual knowledge of the fraudulent nature of the transfer between Nancy and the daughters. 97 A negative answer to the second question obviates the need to decide the first, a difficult issue of first impression for this Court with repercussions well beyond this case. Assuming arguendo that actual knowledge of the fraudulent nature of the conveyance of September 15, 1982 would act to bar Robert in this case, a review of the record satisfies us that sufficient evidence of such knowledge with respect to Robert is lacking in this case. 98 As a preliminary matter, the magistrate judge did not find that the evidence affirmatively established that Robert had actual knowledge of a fraudulent conveyance. Rather, our reading of the magistrate judge's finding was that Robert failed to sustain his burden of showing that he lacked such knowledge. 826 F.Supp. at 1500. Because this finding was made in the context of determining whether Robert was entitled to the protection of N.Y. Debtor & Creditor Law Sec. 278 and because the mortgage was an intrafamily transaction, the magistrate judge allocated to appellants the burden of proving that Robert had no knowledge of the fraudulent nature of the conveyance between Nancy and the daughters. Although the magistrate judge found no direct evidence of actual knowledge, he reasoned that the intrafamily nature of the transaction created an inference that Robert had knowledge of the tax liens and knew that the transfer of the Property from Nancy to her daughters was done fraudulently for the purpose of avoiding her creditor, the United States Government. Id. 99 By contrast, to deprive a person of protection under section 6323(a), a federal statute, the burden and risk of persuading the fact finder that Robert had actual knowledge of a fraudulent conveyance rested with the government. Thus, the magistrate judge's finding that Robert failed to show that he lacked such knowledge is not, without more, sufficient to establish affirmatively that Robert had actual knowledge of the fraudulent conveyance and is in no way dispositive of whether Robert took a mortgage on the Property with actual knowledge that the conveyance to his daughters was fraudulent. 100 Second, the mere fact that the conveyance from Nancy to the daughters was intrafamily is insufficient to establish that Robert was aware of the fraudulent nature of the conveyance. At best, the intrafamily nature of the transaction creates an inference of fraud. Indeed, as discussed above, we cannot conclude that the conveyance was fraudulent as a matter of New York law nor that the consideration set forth on the recorded deed was so inadequate as to put a subsequent purchaser or security interest holder on notice of a fraudulent transfer. 101 Third, assuming that the magistrate judge was correct in drawing the inference from the intrafamily nature of the transfer that Robert was aware of the financial circumstances surrounding the conveyance on September 15, 1982, the record indicates that the tax liens were not the only justification for the transfer. In particular, the government was not the only creditor at the time of the transfer. Rather, significant outstanding balances remained on both the Columbia Bank and the Marine Midland mortgages, interests that were clearly prior to that of the federal government at the time of the conveyance. Concern over possible foreclosure on those mortgages due to Nancy's inability to pay those mortgages was a plausible reason given by Nancy to the IRS as the reason for the conveyance. In addition, Nancy's marriage to Ellison, a family outsider with financial liabilities, provides a second possible reason for the transfer. While we offer no view on the weight to be accorded these justifications for the transfer, we believe they are sufficient to offset an inference that Robert knew of the fraudulent nature of the conveyance where, as here, the government offered no additional direct or indirect evidence of Robert's knowledge concerning the nature of the conveyance at the time he granted the mortgage. 102 Finally, we believe that to deny Robert his $53,000 interest in the Property would work an injustice that the law does not intend. Robert's mortgage enabled Mary and Kelly virtually to extinguish the two prior mortgages on the Property. By eliminating these prior encumbrances, the government's interest in the Property, the federal tax liens, was dramatically improved. By waiting until after the prior encumbrances were extinguished by virtue of Robert's mortgage, the government was able to leap frog those interests at Robert's expense. A result in which Robert, for all practical purposes, forfeits his $53,000 mortgage for the direct benefit of the government interest strikes us as a classic example of unjust enrichment. Because we do not believe that equity warrants such a result, we are satisfied that the application of section 6323(a)'s protection is appropriate in this case.