Opinion ID: 675099
Heading Depth: 2
Heading Rank: 3

Heading: Priority of the Federal Tax Liens

Text: 45 Because we are satisfied as to the validity of the underlying tax liability in this case, we next must determine the priority of the tax liens arising thereunder. We are required, therefore, to unravel the relative priorities and validity of all the interests in the Property as governed by the applicable law. 46 Federal tax liens are creatures of federal law. Section 6321 of Title 26 authorizes the imposition by the Government of a tax lien upon property of the taxpayer when [she] is in default. United States v. 110-118 Riverside Tenants Corp., 886 F.2d 514, 518 (2d Cir.1989), cert. denied, 495 U.S. 956, 110 S.Ct. 2560, 109 L.Ed.2d 743 (1990). A lien imposed pursuant to section 6321, moreover, is deemed to arise at the time that the assessment is made and continues until the amount of liability set forth in the assessment is satisfied. 26 U.S.C. Sec. 6322. 47 By the same token, the relative priority of a federal tax lien is governed by federal law. United States v. Equitable Life Assurance Soc'y, 384 U.S. 323, 328, 330, 86 S.Ct. 1561, 1564, 1565, 16 L.Ed.2d 593 (1966); see also Hartford Provision Co. v. United States, 579 F.2d 7, 9 (2d Cir.1978) ([p]riority of liens under 26 U.S.C. Sec. 6323 is a matter of federal law); PPG Indus. v. Hartford Fire Ins. Co., 531 F.2d 58, 61 (2d Cir.1976). In general, priority as a lienor is determined by the ... rule of 'first in time is the first in right.'  Don King Prods. v. Thomas, 945 F.2d 529, 533 (2d Cir.1991) (quoting United States v. City of New Britain, 347 U.S. 81, 87-88, 74 S.Ct. 367, 371, 98 L.Ed. 520 (1954)). Where the priority of the federal tax lien is challenged by a subsequent purchaser and/or the holder of a security interest in the encumbered property, however, the relative priority of the interests is controlled by 26 U.S.C. Sec. 6323. 48 Section 6323(a) provides that a federal tax lien shall not be valid as against any purchaser [or] holder of a security interest ... until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary. With respect to real property, the notice requirement under the statute requires proper filing of the tax lien pursuant to the laws of the state in which the property subject to the lien is situated. 26 U.S.C. Sec. 6323(f)(1)(A)(i). Where, as here, the property is situated in a state that invalidates a deed against a bona fide purchaser unless the filing of that deed has been recorded, a race-notice state, see Goldstein v. Gold, 106 A.D.2d 100, 101-02, 483 N.Y.S.2d 375, 377 (2d Dep't 1984) (New York is a race-notice state requiring that a subsequent purchaser have no notice of prior purchase or lien and win the race to the recording office), aff'd in part, 66 N.Y.2d 624, 485 N.E.2d 239, 495 N.Y.S.2d 32 (1985), notice of the federal tax lien shall not be treated as meeting the ... requirements with respect to such a purchaser unless the fact of filing [the tax lien] is entered and recorded in [an] index ... in such a manner that a reasonable inspection of the index will reveal the existence of the lien. 26 U.S.C. Sec. 6323(f)(4). 49 Thus, in a priority dispute between the interests of a purchaser or holder of a security interest in property located in New York state and the interests of the government in a federal tax lien on that same property, section 6323(f)(4) effectively transforms the priority determination in New York from one of first in time is first in right into one in which the first to record is the first in right. Where, as here, appellants recorded the conveyance before the government recorded its tax liens, a finding that appellants are protected persons under section 6323(a) would render their interests in the Property prior to that of the tax liens. 50 We note, however, that an important distinction exists as to the status of the 1982 and 1984 tax liens in the context of this litigation. Because federal tax liens arise on the date that the underlying tax assessment is made, 26 U.S.C. Sec. 6322, the 1982 tax lien arose on June 14, 1982, the date of the 1982 tax assessment, whereas the 1984 tax lien did not arise until April 16, 1984, the date of the 1984 assessment. The 1982 tax lien, then, attached to the Property before Nancy conveyed it to Mary and Kelly. As such, that lien remains on the Property regardless of whether or not the conveyance is set aside, absent a finding that Mary and Kelly are purchasers entitled to the protection of section 6323(a). See Don King Prods., 945 F.2d at 533; see also United States v. Bess, 357 U.S. 51, 57, 78 S.Ct. 1054, 1058, 2 L.Ed.2d 1135 (1958) (transfer of property subsequent to the attachment of the lien does not affect the lien, for 'it is the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere' ) (citation omitted); United States v. Cache Valley Bank, 866 F.2d 1242, 1244-45 (10th Cir.1989) (unless third party comes within protection of section 6323, third party holds property subject to tax lien and lien also attaches to after-acquired property because transfer of property subsequent to attachment of lien does not affect lien). By contrast, the 1984 tax lien arose on the Property after Nancy conveyed it to her daughters. Thus, absent a set aside of that conveyance under state law, the 1984 tax lien could not arise on 74 Meadow Creek Lane or any other property in which Nancy, the assessed individual, did not have a legal interest at the time liability was assessed. 51 With this in mind, we interpret the government's case at trial as asserting priority over appellants' interests under different theories with respect to each lien. First, as to the 1982 tax lien, the government contended only that its interest in the Property was prior to those of the appellants under section 6323, the applicable federal law governing priority of federal tax liens. Specifically, it argued that appellants were not protected persons within the meaning of section 6323(a), i.e., that appellants were neither purchasers nor holders of security interests as defined by section 6323(h). Thus, the government insisted that appellants could not invoke the protections of section 6323(a) and (f)(4). 52 As to the 1984 tax lien, however, the government argued that the conveyance of the Property from Nancy to Mary and Kelly should be set aside altogether as fraudulent under New York law. In support of its fraudulent conveyance claim, the government offered two theories of fraudulent intent under New York law: (1) constructive fraud where the conveyance is presumptively fraudulent when made for inadequate consideration regardless of the intent of the transferor pursuant to N.Y. Debtor & Creditor Law Sec. 273 (section 273), and (2) actual intent to defraud pursuant to N.Y. Debtor & Creditor Law Sec. 276 (section 276). Without a finding of fraud, however, the government's 1984 tax lien could not reach the Property since it attached at a time when Nancy, the assessed individual, no longer held an interest in the Property. At trial, therefore, the government's fraudulent conveyance claim was directed only to the latter of the two tax liens on the theory that the conveyance was motivated by Nancy's attempt to defeat the validity of the 1984 tax lien. 53 The magistrate judge, however, subsumed his analysis of the government's theory with respect to the 1982 tax lien--section 6323--in his analysis of the government's theory with respect to the 1984 tax lien--fraudulent conveyance. He reasoned that because New York law does not distinguish between present and future creditors, I will be considering the fraudulent conveyance argument as in light of the June 14, 1982 tax assessment as well. 826 F.Supp. at 1495 n. 22. He then proceeded to set aside the conveyance as both constructively fraudulent and actually fraudulent under New York law. By finding constructive fraud, moreover, the magistrate judge concluded that due to the lack of fair consideration given for the property, defendants Mary and Kelly McCombs cannot be purchasers within the meaning of 26 U.S.C. Sec. 6323(h)(6). Id. at 1497. 54 Not surprisingly then, appellants' primary quarrel with the district court's determination of the priority of interests in this case involves the magistrate judge's determination that Nancy's conveyance of the Property to Mary and Kelly was fraudulent as a matter of New York law. Appellants contend that the magistrate judge's analysis of the fraudulent conveyance claim was skewed legally and factually and thus deprived the daughters of the protection to which they would otherwise have been entitled under section 6323(a) in determining the relative priority of their interests with respect to the tax liens. Appellants argue, moreover, that the magistrate judge's fraudulent conveyance analysis infected his finding that Robert could not invoke protection under 26 U.S.C. Sec. 6323 with respect to his security interest in the Property. We agree with the appellants' position.
55 We turn first to the primary issue raised by the parties on appeal with respect to the foreclosure dispute: whether the conveyance from Nancy to her daughters must be set aside as fraudulent under New York law. We note at the outset that the validity of the conveyance in this case is governed by New York law. See Aquilino v. United States, 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1279, 4 L.Ed.2d 1365 (1960) (federal ... courts must look to state law to ascertain whether a taxpayer has a property interest in property subjected to a federal tax lien). In setting aside the conveyance as fraudulent, the magistrate judge relied on two separate grounds, both of which are codified under article 10 of New York's Debtor & Creditor Law by virtue of that state's adoption of the Uniform Fraudulent Conveyance Act. See generally N.Y. Debt. & Cred. Law Secs. 270-281 (McKinney 1990). First, the magistrate judge found that the conveyance was fraudulent per se under section 273, the constructive fraud provision, because, regardless of the appellants' intent, Nancy was an insolvent person who conveyed the Property for less than fair consideration. Second, the magistrate judge found that, even if the conveyance was not fraudulent per se under section 273, Nancy conveyed the Property with the intent to defraud creditors, such as the government, and thus, the conveyance ran afoul of section 276.
56 Section 273 states: Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to [her] actual intent if the conveyance is made or the obligation is incurred without a fair consideration. (emphasis added). Thus, [s]ection 273 ... covers constructive, as opposed to actual, fraud. Southern Indus. v. Jeremias, 66 A.D.2d 178, 181-82, 411 N.Y.S.2d 945, 948 (2d Dep't 1978). To establish a fraudulent conveyance under this provision, therefore, the government must prove that (1) Nancy conveyed the Property to her daughters, (2) Nancy was or would thereby have become insolvent at the time she made the conveyance, and (3) she made the conveyance without fair consideration. 57 It is undisputed that the first of these elements was established. Appellants concede, moreover, that Nancy was insolvent at the time of the transfer under New York law. Appellants' attack, therefore, is primarily confined to the third element, namely, the magistrate judge's determination that the conveyance was made without fair consideration. 58
59 As an initial matter, we disagree with the magistrate judge's decision to deviate from the general rule that the party asserting the claim of fraudulent conveyance bears the burden of establishing the element of unfair consideration. See American Inv. Bank v. Marine Midland Bank, 191 A.D.2d 690, 691-92, 595 N.Y.S.2d 537, 538 (2d Dep't 1993); Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 126, 508 N.Y.S.2d 17, 20 (2d Dep't 1986), appeal dismissed, 69 N.Y.2d 875, 514 N.Y.S.2d 1029, 507 N.E.2d 322 (1987). In shifting the burden to the appellants on this issue, the magistrate judge reasoned that the intrafamily nature of the conveyance created a presumption that shifted the burden of proving the fairness of the consideration to the appellants as a matter of law. See 826 F.Supp. at 1496. After reviewing the applicable law, however, we believe that the fairer approach, in a case like this, where the only issue under section 273 is whether the consideration given constituted fair consideration relative to the fair market value of the Property, as opposed to disputes over the specific nature or value of the consideration itself, would be to leave the burden for establishing unfair consideration under section 273 with the party asserting the fraudulent conveyance claim. 60 Presumptions and other matters related to the burden of proof are considered matters of substantive law, governed by the law of the jurisdiction whose substantive law applies to the merits of the question in issue. See Dick v. New York Life Ins. Co., 359 U.S. 437, 446, 79 S.Ct. 921, 927, 3 L.Ed.2d 935 (1959) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938)); 9 Wright & Miller Sec. 2409, at 337. Since the government seeks to set aside the conveyance as fraudulent under New York law, it follows that New York law governs the allocation of burden of proof on that issue. 61 In general, a fraudulent conveyance claim brought under section 273 places [t]he burden of proving ... the lack of fair consideration ... upon the party challenging the conveyance. American Inv. Bank, 191 A.D.2d at 692, 595 N.Y.S.2d at 538. There is some authority under New York law, however, for the view that where the evidentiary facts as to the nature and value of the consideration are within the transferee's control, the burden of coming forward with evidence on the fairness of the consideration shifts to the transferee[,] ACLI Gov't Sec. v. Rhoades, 653 F.Supp. 1388, 1391 (S.D.N.Y.1987) (emphasis added), aff'd mem., 842 F.2d 1287 (2d Cir.1988), and the [burden of proving the] fairness of the consideration therefor, should be cast upon the transferees, Gelbard v. Esses, 96 A.D.2d 573, 576, 465 N.Y.S.2d 264, 268 (2d Dep't 1983). Where the transaction involves family members, moreover, and the transaction was made without any tangible consideration, a heavier burden is placed upon the grantee to demonstrate fair consideration for the transfer. Liggio v. Liggio, 53 A.D.2d 543, 549, 385 N.Y.S.2d 33, 39 (1st Dep't 1976); see also Rhoades, 653 F.Supp. at 1391; Orbach v. Pappa, 482 F.Supp. 117, 119 (S.D.N.Y.1979). 62 By contrast, we can find no authority under New York law for shifting the burden of proving fair consideration to a grantee where, as here, the evidentiary facts as to the nature and value of the consideration are not exclusively within the control of the transferee. Rather, our review of the case law and possible rationales for shifting the burden in a fraudulent conveyance claim brought under section 273 convinces us that New York law would not shift the burden of persuasion in this case where the evidence of the specific value and nature of the consideration was available to the creditor and the only issue to be decided is whether the value of that consideration approaches the fair market value of the property in issue. 63 Our conclusion derives, first and foremost, from an examination of the facts in cases where the courts have shifted the burden. In both Liggio and Esses, the two New York cases on point, the transactions in issue either involved no tangible consideration or involved consideration of which the nature and value were within the exclusive control of the transferee. Specifically, in Liggio, the plaintiff, a divorced spouse, challenged her deceased ex-husband's clandestine conveyance of property to his mother, without any tangible consideration, for the purpose of concealing the defendant husband's assets. The trial court granted defendants' motion to dismiss on the ground that plaintiffs had failed to state a prima facie case. On appeal, the Liggio Court, noting both the clandestine nature of the transfer, 53 A.D.2d at 549, 385 N.Y.S.2d at 39, and the fact that defendants without calling any witnesses or otherwise rebutting plaintiffs' case, ... rested and moved to dismiss the complaint for failure to make out a prima facie case, 53 A.D.2d at 545, 385 N.Y.S.2d at 35-36, found that defendants had failed to carry the heavier burden of demonstrat[ing] fair consideration for the transfer, a burden associated with an intrafamily transaction such as the conveyance herein, and ordered the conveyance set aside. 53 A.D.2d at 549, 385 N.Y.S.2d at 39, 40 (emphasis added). 64 In Esses, the court was confronted with an allegedly fraudulent transfer of assets held by a family corporation. Esses, 96 A.D.2d at 575, 465 N.Y.S.2d at 267. The transfer of assets was made pursuant to a complicated and intricate agreement involving the exchange of assets and stock interests in corporations pursuant to certain corporate security agreements between family members. 96 A.D.2d at 573-75, 465 N.Y.S.2d at 265-67. In light of the nature of this transaction, the court concluded that the evidentiary facts as to the nature and value of the consideration are within the transferees' control  and, therefore, the burden of coming forward with evidence disclosing the nature and value of the security interest furnished by the corporation in return for the transferees' loan ... should be cast upon the transferees. 96 A.D.2d at 576, 465 N.Y.S.2d at 268 (emphasis added). The court added that this was particularly appropriate in this case because the Bankruptcy Court did not authorize the creation of a security interest in the assets of the corporation ... but rather, merely authorized [the family defendants] to furnish collateral in the form of their stock interests. Id. 65 Our review of these and other New York cases, moreover, furnishes us with two possible rationales for why the specific nature of the transactions in intrafamily conveyance cases could warrant the placing of the burden on the grantee. First, it is clear that New York law creates a presumption of fraud in fraudulent conveyance cases, such as Liggio, where the conveyance was made without evidence of any tangible consideration. See Gafco, Inc. v. H.D.S. Mercantile Corp., 47 Misc.2d 661, 665, 263 N.Y.S.2d 109, 115 (N.Y.C.Civ.Ct.1965); Campbell v. Brown, 268 A.D. 324, 328, 51 N.Y.S.2d 310, 313 (3d Dep't 1944), appeal dismissed, 294 N.Y. 702, 60 N.E.2d 849 (1945); Babylon Plumbing & Heating Supply Corp. v. Kahn, 249 A.D. 830, 830, 292 N.Y.S. 394, 394 (2d Dep't 1937); cf. Boessneck v. Cohn, 7 N.Y.S. 620, 621 (N.Y.Sup.Ct.1889) (a substantial excess between the value of personal property transferred and the amount of debt to be secured does not of itself raise a presumption of fraud). Second, the clandestine nature of the specific intrafamily transactions in the cases where courts have shifted the burden to the transferee creates a situation where the evidentiary facts as to the nature and value of the consideration may be exclusively within the transferee's control thereby requiring that the burden of coming forward with evidence on the fairness of the consideration shifts to the transferee. See also Rhoades, 653 F.Supp. at 1390 (where conveyance was made for $1.00 and unspecified 'other good consideration ' ) (emphasis added). Thus, we are satisfied that shifting the burden of persuasion to an intrafamily transferee is triggered under New York law by the presence of one of two factors in the conveyance: (1) the absence of any tangible consideration, or (2) a clandestine transfer of property designed to conceal the nature and value of the consideration. 66 We find neither of those factors to be implicated in this case. First, despite the government's suggestion to the contrary, we agree with the magistrate judge that the assumption of and agreement to pay the Columbia Bank and Marine Midland mortgages by the daughters constitutes tangible consideration under New York law. See Eskelson v. Inter-County Title Guar. & Mortgage, 207 N.Y.S.2d 27, 29 (N.Y.Sup.Ct.1960); Onondaga County Sav. Bank v. Markson Bros., 182 Misc. 954, 957, 52 N.Y.S.2d 148, 151 (Onondaga Co.Ct.), aff'd, 263 A.D. 794, 32 N.Y.S.2d 109 (4th Dep't 1941); cf. Schmitt v. Morgan, 98 A.D.2d 934, 936, 471 N.Y.S.2d 365, 367 (3d Dep't 1983) (finding that conveyance based on oral promise to take over mortgage payments for insolvent debtor, to allow debtor to reside at property, and to reconvey property to debtor's son at later date constituted a promise of future support rather than consideration), appeal dismissed, 62 N.Y.2d 914, 467 N.E.2d 893, 479 N.Y.S.2d 9 (1984). Thus, we are satisfied that this is not a case where property was conveyed without any tangible consideration, and agree with the magistrate judge that the central issue here is simply whether the consideration was not fair because it was less than the Property's fair market value. 67 Second, we find nothing clandestine about the conveyance that would justify the placing of an evidentiary burden on the appellants to come forward with evidence exclusively within their control concerning the nature and value of the consideration. The government does not contend that it is unable to determine the precise parameters of the consideration paid by the daughters. Indeed, it was the government that introduced documentary evidence of the nature and terms of the consideration. Appellants, moreover, do not deny the specific terms of the consideration nor does the record contain any evidence of an attempt on the part of the appellants to conceal those terms from the government. 68 In the absence of any of the above factors, we can find no overriding basis under New York law to create a presumption of fraud in this case solely because the conveyance was between family members. Indeed, we are at a loss to understand why the intrafamily nature of the conveyance has any relevance whatsoever to whether the assumption of outstanding mortgages on the Property approximated the fair market value of the Property, the ultimate issue in this section 273 claim. Because we can find no basis in policy or law to establish that the New York Court of Appeals would extend Liggio and Esses to this case, we believe it only fair that the burden of proving that the consideration was disproportionately less than the fair market value of the Property remains with the government, the party asserting the fraudulent conveyance claim. 1 69
70 Next, we turn to the issue of whether the consideration given in this case was in fact fair as that term applies in section 273. We do so, however, simply to correct a factual finding by the magistrate judge that we believe to be both clearly erroneous and material to the determination that the consideration was not fair under section 273. Accordingly, we offer no view, after correcting for this error, on the merits of the government's fraudulent conveyance claim under section 273. 71 To this end, we note that despite New York's attempt to codify when fair consideration is given, see N.Y. Debt. & Cred. Law Sec. 272 (McKinney 1990) (section 272), 2 our review of the case law convinces us that the concept can be an elusive one that defies any one precise formula. Indeed, [w]hat constitutes fair consideration under [section 272] must be determined upon the facts and circumstances of each particular case. Orbach, 482 F.Supp. at 119 (citing Halsey v. Winant, 258 N.Y. 512, 523, 180 N.E. 253, 256, cert. denied, 287 U.S. 620, 53 S.Ct. 20, 77 L.Ed. 539 (1932)). 72 Based on the facts and circumstances in this case, the parties agree that the inquiry into the sufficiency of the consideration given for the Property turns primarily on whether the value of the assumed mortgages approached the relative value of the Property. In concluding that it did not, the magistrate judge made a factual finding as to the monetary value of the consideration that is clearly erroneous. Specifically, in determining that value, the magistrate judge incorrectly found that the daughters assumed only the Columbia Bank mortgage whereas they took the Property subject to the Marine Midland mortgage, the second and larger of the mortgages on the Property. 826 F.Supp. at 1497. A review of the terms of the conveyance set forth in the deed, however, unequivocally shows that the daughters assume[d] and agree[d] to pay  the Marine Midland mortgage as well as the Columbia Bank mortgage as consideration given for the Property. (emphasis added). Because we believe this distinction is crucial to determining the fairness of the consideration under the method utilized by the magistrate judge, we pause to review the magistrate judge's finding as to the precise value of the consideration given by the daughters before proceeding to evaluate its fairness under New York law. 73 The district court found the value of the Property to be $85,657. Id. It then credited the principal balance on the Columbia Bank mortgage assumed by the daughters, $10,469.29, as consideration for the conveyance. Id. Because the magistrate judge was under the misconception that the daughters took the Property subject to rather than in assumption of the $47,328.65 balance remaining on the Marine Midland mortgage, however, he refused to credit that additional amount towards the value of the consideration. Instead, he reasoned that the conveyance of the Property subject to the Marine Midland mortgage served only to reduce the relative value of the Property conveyed to the daughters by $47,328.65, the amount of the balance remaining on the Marine Midland mortgage, and thereby reduced the relative value of the Property from its fair market value of $85,657 to $39,328.35 [sic]. Id. Using the latter figure, the magistrate judge found that Kelly and Mary received property valued at $39,328.35 in return for consideration valued at $10,469.29 and concluded that the value of the Property conveyed was nearly four times greater than the amount of consideration paid. Id. 74 By contrast, had the magistrate judge credited Mary and Kelly with the assumption of both mortgages as set forth in the deed, the total consideration given would have been the sum of the outstanding balances on both mortgages or $57,797.94. Because the daughters assumed, rather than took subject to, the Marine Midland mortgage, moreover, the fair market value of the Property, under the method of analysis employed by the magistrate judge, would remain at $85,657 rather than being reduced by the outstanding balance of the Marine Midland mortgage because, like the Columbia Bank mortgage, the daughters assumed rather than took subject to its obligation. Under his approach, therefore, the magistrate judge should have evaluated the adequacy of consideration valued at $57,797.94 given for Property with a fair market value of $85,657. 75 In our view, therefore, the government's fraudulent conveyance claim under section 273 rises or falls on whether it can prove that consideration of $57,797.94 is disproportionately unequal to the value of the Property as considered in the context of a forced foreclosure proceeding. Here, however, the magistrate judge not only improperly allocated the burden of proof, an error of law, but made a clearly erroneous factual finding that the daughters took the Property subject to rather than in assumption of the Marine Midland mortgage. Accordingly, the analysis underlying the finding that the daughters gave inadequate consideration under section 273 is tainted and requires us to remand the issue for further findings by the district court after correcting for these errors of law and fact.
76 In addition to setting aside the conveyance as constructively fraudulent under section 273, the district court set aside the conveyance as actually fraudulent under section 276. Section 276 provides: 77 Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors. 78 N.Y. Debt. & Cred. Law Sec. 276 (emphasis added). Thus, unlike section 273 which creates constructive fraud by virtue of the lack of fair consideration, section 276 focuses on the actual intent of the transacting parties. Indeed, where actual intent to defraud creditors is proven, the conveyance will be set aside regardless of the adequacy of consideration given. 79 The burden of proving actual intent is on the party seeking to set aside the conveyance. Marine Midland Bank, 120 A.D.2d at 126, 508 N.Y.S.2d at 20; see also Rhoades, 653 F.Supp. at 1394. Actual intent to defraud, moreover, must be proven by clear and convincing evidence. Rhoades, 653 F.Supp. at 1394. While the issue of intent is normally a question of fact under New York law, we will review the district court's ultimate conclusion that the conveyance was fraudulent under section 276 de novo as an issue involving the application of law to fact. See In re Hygrade Envelope, 366 F.2d at 588. 80 Under section 276, [t]he fraudulent nature of a conveyance may be inferred from the relationship among the parties to the transaction and the secrecy of the sale, or from inadequacy of consideration and hasty, unusual transactions. In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1041 (2d Cir.1984) (citing United Parcel Serv. v. Jay Norris Corp., 102 Misc.2d 231, 233, 423 N.Y.S.2d 125, 127 (N.Y.Sup.Ct.1979); Gafco Inc., 47 Misc.2d at 664-65, 263 N.Y.S.2d at 114). 81 Here, it is undisputed that Nancy had a close relationship with her daughters and that she continued to reside at the Property after the conveyance. The magistrate judge found, moreover, that Nancy was aware of her indebtedness to the government by virtue of the 1982 assessment, an IRS agent having left his business card at her residence several days prior to the conveyance. 826 F.Supp. at 1498. 82 On the other hand, the government introduced the written memorandum of an IRS agent who had interviewed Nancy and noted her explanation that the transfer had been motivated by her financial inability to pay Columbia Bank and Marine Midland. Additionally, the conveyance was close in time to Nancy's October 1982 wedding to Jon Ellison, providing at least indirect support for appellants' claim that the transfer was motivated by Nancy's desire to keep the property exclusively in the McCombs family. Finally, as previously noted, the conveyance was supported by some tangible consideration and the transaction was not unusually clandestine. Thus, while several badges of fraud were present to justify an inference of fraud in this case, other evidence was to the contrary. 83 Were the fraudulent conveyance inquiry merely a battle between the badges on the one hand and inferences of Nancy's nonfraudulent motivation on the other, we would be reluctant to disturb the magistrate judge's finding of actual fraudulent intent requiring a set aside of the conveyance under section 276. Our reading of the magistrate judge's analysis of the issue, however, convinces us that it was infected by the same errors that tainted the fraudulent conveyance inquiry under section 273. A central factor relied on in the magistrate judge's finding of fraudulent intent under section 276 was his finding that the Property was conveyed for inadequate consideration. See 826 F.Supp. at 1498. As discussed previously, however, this finding was flawed both legally and factually. To the extent that the magistrate judge relied on the inadequacy of the consideration to infer fraudulent intent under section 276, therefore, such an inference was necessarily infected by the legal and factual flaws underlying the initial consideration analysis and must be reconsidered on remand in light of any corrected findings on the consideration issue. 3
84 Despite the magistrate judge's reliance on a state law fraudulent conveyance theory in determining the priority of the 1982 tax lien, the record is clear that the government's argument for foreclosure on that particular lien was predicated solely on its claim that Mary and Kelly were not entitled to protection under section 6323(a) because they were not purchasers within the meaning of the statute. See 26 U.S.C. Sec. 6323(h)(6). In light of the government's view of its own case, a view expressed in both its opening and closing statements at trial, as well as our concern that state fraudulent conveyance law may be irrelevant to the dispute over the 1982 tax lien in this case, see note 3, we instruct the magistrate judge, on remand, to decide the case as it was tried and not to substitute, sua sponte, other theories on a party's behalf. See, e.g., 826 F.Supp. at 1495 n. 22. Accordingly, on remand, the magistrate judge, in reconsidering foreclosure predicated on the 1982 tax lien, need determine only whether or not Mary and Kelly are purchasers under section 6323(a). 85 Notwithstanding the government's primary reliance on section 6323(a), moreover, the magistrate judge failed to address the issue in any detail because he found the conveyance to be fraudulent under state law. Apparently, the magistrate judge, like the government, viewed the inquiry as to whether Mary and Kelly were purchasers under section 6323(a), and thus protected under federal law, as essentially identical to that of state fraudulent conveyance law under section 273; namely, whether the Property was conveyed for fair consideration. See 826 F.Supp. at 1497. 86 Admittedly, the definition of who is entitled to protection as a purchaser under section 6323(h)(6) employs language that is similar to that employed by New York fraudulent conveyance law. Compare 26 U.S.C. Sec. 6323(h)(6) (purchaser means a person who, for adequate and full consideration ... acquires an interest ... in property which is valid under local law against subsequent purchasers without actual notice) with N.Y. Debt. & Cred. Law Sec. 272(b). Section 6323(a), however, is a creature of federal law while the latter is governed by state law. See Don King Prods., 945 F.2d at 543; United States v. Paladin, 539 F.Supp. 100, 103 (W.D.N.Y.1982) ([t]he requirement of adequate and full consideration [under section 6323(h)(6) ] is a matter of federal rather than state law and must be strictly applied) (citing Continental Oil Co. v. United States, 326 F.Supp. 266, 270-71 (S.D.N.Y.1971)); see also 26 C.F.R. Sec. 301.6323(h)-1(f)(3) (full and adequate consideration under section 6323(h)(6) is an amount having a reasonable relationship to the true value of the interest in the property acquired and may include the consideration in a bona fide bargain purchase). State fraudulent conveyance law, therefore, is not necessarily dispositive of whether a person will qualify for protection under section 6323(a) in all cases. 87 Here, a finding that Nancy conveyed the Property to her daughters for adequate consideration under New York law, while helpful, does not provide a rule of decision that Mary and Kelly are federally protected purchasers under section 6323(a). Accordingly, on remand, the district court should be guided in its analysis of whether Mary and Kelly are purchasers under section 6323(a) by applicable federal, rather than state, law.
88 Our decision to vacate the judgment as to the set aside of the conveyance under sections 273 and 276 and to remand those matters for further proceedings, renders the status of the 1984 tax lien an open issue. As we noted earlier in the opinion, a federal tax lien arises on the date that the tax is assessed. 26 U.S.C. Sec. 6322. Here, the 1984 tax lien arose on April 16, 1984, the date that Nancy, the individual found to be personally liable for the additional unpaid payroll taxes, was assessed that additional tax liability under section 6672. In April 1984, however, Nancy no longer held legal title to the Property. Rather, in 1984, title to the Property vested in Mary and Kelly by virtue of the conveyance from Nancy to Mary and Kelly on September 15, 1982. Absent a set aside of that conveyance as fraudulent under New York law, it follows that the 1984 tax lien would be invalid as to 74 Meadow Creek Lane because it was assessed at a time when the individual who incurred the tax liability no longer owned the Property. Accordingly, the judgment of foreclosure on the 1984 tax lien must be vacated and held in abeyance until the fraudulent conveyance claim is resolved on remand. 4
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.