Opinion ID: 2547975
Heading Depth: 1
Heading Rank: 6

Heading: Kentucky's Tax Lien Statute

Text: The power to tax is inherent in the sovereignty of the state, and is essential to its existence. Reynolds Metal Co. v. Martin, 269 Ky. 378, 382, 107 S.W.2d 251, 253 (1937). Except to the extent that the Commonwealth's taxing power may be prohibited or limited by the State's Constitution, or that of the United States, it may be exercised without limit. See id. Every citizen of the Commonwealth of Kentucky has an enforceable duty to pay taxes properly levied. In an effort to protect its tax base and to aid in the collection of past due tax revenue, the Kentucky General Assembly created certain tax liens with the passage of KRS 134.420. Prior to its amendment during the 2009 legislative session, KRS 134.420 contained five subsections. Subsection 1, which is the current version of KRS 134.420, related to ad valorem taxes, or taxes based upon the value of real or personal property. Because this case does not involve ad valorem taxes, this provision is inapplicable to this case. The remaining subsections of the old KRS 134.420 addressed general tax liens. For purposes of resolving this case, subsections 2 and 4 are particularly applicable. The prior version of subsection 2, which is now contained in KRS 131.515, provided that: (2) If any person liable to pay any tax administered by the Department of Revenue, other than a tax subject to the provisions of subsection (1) of this section, neglects or refuses to pay the tax after demand, the tax ... shall be a lien in favor of the Commonwealth. The lien shall attach to all property and rights to property owned or subsequently acquired by the person neglecting or refusing to pay the tax. The prior version of subsection 4, now KRS 131.515(3), provided that the lien created by the statute shall not be valid as against any purchaser, judgment lien creditor, or holder of a security interest or mechanic's lien until notice of the tax lien has been filed ... with the county clerk.... Id. Moreover, [t]he recording of the tax lien shall constitute notice of both the original assessment and all subsequent assessments of liability against the same taxpayer. Id. Both lenders in this case argue that the old KRS 134.420(1) provided a super priority [1] for ad valorem taxes, but that the general tax lien provision enjoys no special priority. We disagree. Subsection 4 fixes the priority of general tax liens. See Liberty Nat'l Bank & Trust Co. of Lou. v. Vanderkraats, 899 S.W.2d 511 (Ky.App.1995) ([C]onsidering section (4) in light of section (2), we see that section (4) is indeed a priority statute.) (emphasis in original). See also Commonwealth v. Hall, 941 S.W.2d 481, 483 (Ky. App.1997). Indeed, subsection 4 clearly and explicitly states that a properly filed tax lien shall be valid against any purchaser, judgment lien creditor, or holder of a security interest. It is undisputed that a mortgage is a security interest and that the professional lenders in this case are holders of those security interests. Allen v. Shepherd, 162 Ky. 756, 760, 173 S.W. 135, 136 (Ky.1915) (The rule in this State in reference to mortgages, whether on personal or real estate, is, that they are mere securities for the debt.) Wells Fargo relies upon Kentucky Legal Systems Corp. v. Dunn, 205 S.W.3d 235 (Ky.App.2006) for the proposition that a purchase money mortgage enjoys an absolute priority over all liens. The holding in Dunn, however, was much narrower. In Dunn, the Kentucky Legal Systems (KLS) argued that its judgment lien was senior to the lender's purchase money mortgage pursuant to the first in time, first in right doctrine. Id. at 236. KLS also argued that the lender was on constructive notice of the judgment lien and that the lender failed to exercise due care before making the loan. Id. After concluding that neither KRS 382.270 nor KRS 382.280 foreclose the possibility of an exception for purchase money mortgages to the ordinary rules of priority the court of appeals held that Kentucky should adopt the Restatement (Third) view that third parties who lend money used to purchase real estate in exchange for a mortgage hold special priority over all other recorded liens and judgments except where agreed otherwise by the parties or specified by statute. Id. at 237 (emphasis added). Further, the Dunn court held that the lending institution as a purchase money lender, did not need to search for judgment liens, as they should be given a first priority over a judgment lien regardless of whether they had notice of any kind of interest. Id. Judgment liens and tax liens are two different creatures, created by two different statutes. They also serve different public policy purposes, one favors collecting on civil judgments, the other favors collecting tax revenue that is necessary to fund our government. Judgment liens are created by KRS 426.720, which does not create a special priority for such liens. KRS 134.420, however, specifically establishes a priority for the tax liens created therein. Accordingly, because Dunn addressed judgment liens, not KRS 134.420(2) tax liens, we find it to be inapposite to this case. In the case sub judice, we hold that the Kentucky General Assembly acted within its power to enact a law that serves a very important public policy purpose. Without tax revenue, our government would screech to a grinding halt. It is imperative that the citizens of this Commonwealth pay their fair share to provide the Commonwealth with the means to provide essential government services. Without tax revenue, our schools, our roads, and indeed even our public safety would be seriously jeopardized. Therefore, it is equally imperative that the Commonwealth has the means to effectively enforce its tax liens. With this underlying policy in mind, the legislature created the machinery for collection of its taxesKRS 134.420(2)and provided those tax liens priority over subsequent holders of security interests, including purchase money lenders. As the Vanderkraats court noted, lenders can protect themselves against what they consider to be an unjust result by requiring that the tax liens are satisfied before lending money for the purchase of the property. See Vanderkraats, 899 S.W.2d at 511. Alternatively, the lender can choose not to lend. Accordingly, we hold that the plain language of KRS 134.420(2) and (4) establishes that a tax lien created and filed in accordance with those sections enjoys a priority over all subsequent purchasers, judgment lien creditors, security interest holders, and mechanic's lien creditors.