652 F. Supp. at 468), "holds true even if the expenditures are necessary to remain in business." Schwinger v. United States, 652 F. Supp. at 468. Consequently, Ms. McCombs-Ellison "willfully disregarded her duty," Feist v. United States, 607 F.2d at 961, when she paid "other creditors with knowledge that withholding taxes were due." Hochstein v. United States, 900 F.2d at 548.
C. The Lien Attached to 74 Meadow Creek Lane as of Date of Assessment
26 U.S.C. § 6321
"authorizes the imposition by the government of a tax lien upon the 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, 109 L. Ed. 2d 743, 110 S. Ct. 2560 (1990). "The lien imposed by section 6321 arises at the time the assessment is made and . . . continues until the liability for the amount so assessed . . . is satisfied." 26 U.S.C. § 6322. Specifically, upon assessment, "the law creats a lien in favor of the United State on all real and personal property belonging to the [taxpayer]," United States v. McDermott, 113 S. Ct. 1526, 123 L. Ed. 2d 128, 133, 1993 WL 76913, at *1 (1993), and "is effective . . . against all persons, even in the absence of recordation of the lien." Don King Productions, Inc. v. Thomas, 945 F.2d 529, 533 (2d Cir. 1991).
Accordingly, a lien in the amount of $ 26,925.79 was created on June 14, 1982, and lien attached to Ms. McCombs-Ellison's property located at 74 Meadow Creek Lane on that date. The issue thus becomes whether the government's tax lien has priority over the encumbrances on the property at 74 Meadow Creek Lane. As the following discussion indicates, the government's liens are entitled to priority over all encumbrances on the property.
D. Priority of United States' Tax Lien
"The relative priority of a United States lien for unpaid taxes is a federal question." United States v. Equitable Life Assurance Society of the United States, 384 U.S. 323, 330, 86 S. Ct. 1561, 1565, 16 L. Ed. 2d 593 (1966). However, "both federal and state courts must look to state law" when determining whether a taxpayer has property, or property rights, to which a federal tax lien could attach. Aquilino v. United States, 363 U.S. 509, 512-513, 80 S. Ct. 1277, 1280, 4 L. Ed. 2d 1365; United States v. Brosnan, 363 U.S. 237, 240, 80 S. Ct. 1108, 1111, 4 L. Ed. 2d 1192 (1960). But "once the tax lien has attached to the taxpayer's state-created interests, . . . federal law . . . determines the priority of competing liens asserted against the taxpayer's" property rights. Aquilino v. United States, 363 U.S. 509, at 513-514, 80 S. Ct. at 1280; United States v. Rodgers, 461 U.S. 677, 683, 103 S. Ct. 2132, 2137, 76 L. Ed. 2d 236 (1983)("it has long been an axiom of our tax collection scheme that, although the definition of property interests is left to state law, the consequences that attach to those interests is a matter left to federal law").
As the facts above indicate, there is no dispute that Ms. McCombs-Ellison owned the property in question at the time the lien arose on June 14, 1982. Nor is it disputed that the property was encumbered by the remaining principal balance of the Columbia Bank Purchase Money Mortgage, as well as by the remaining principal on the $ 50,000 Marine Midland Bank mortgage. Despite the liens created by the mortgages, title to the 74 Meadow Creek Lane property remained in Ms. McCombs-Ellison. Goodell v. Silver Creek National Bank, 48 N.Y.S.2d 572 (Sup. Ct. Chautauqua Co. 1944), aff'd 268 A.D. 1020, 53 N.Y.S.2d 529 (4th Dept. 1944) ("A mortgagor is one, who having some part of the title to property, by written instrument pledges that property for some particular purpose such as security for a debt"). Therefore, she may be said to have had an interest in the property at the time the lien arose, subject, of course, to the Columbia Banking and Marine Midland mortgages. Indeed Ms. McCombs-Ellison conveyed her interest in the property to her daughters on September 15, 1982. In exchange, they assumed the remaining principal balance on the Columbia Banking mortgage, and further agreed to take the premises subject to the Marine Midland Bank mortgage. Because it is clear that Ms. McCombs-Ellison has a state-created property interest, and because "the consequences that attach to those interests is a matter left to federal law," United States v. Rodgers, 461 U.S. 677, 683, 103 S. Ct. 2132, 2137, 76 L. Ed. 2d 236 (1983), this court must look to federal law, in order to "determine the priority of competing liens asserted against the taxpayer's [Ms. McCombs-Ellison]" property rights. Aquilino v. United States, 363 U.S. 509, at 513-514, 80 S. Ct. at 1280; PPG Industries, Inc. v. Hartford Fire Insurance Co., 531 F.2d 58, 61 (2d Cir. 1976) ("The resolution of priority conflicts involving federal tax liens is a matter of federal law requiring an interpretation of 26 U.S.C. § 6323"); Hartford Provision Co. v. United States, 579 F.2d 7, 9 (2d Cir. 1978) (same).
The Supreme Court addressed the issue of federal tax lien priority very recently, stating that federal tax liens "do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principal that 'the first in time is the first in right.'" United States v. McDermott, supra, 1993 WL 76913, at *2 (citations omitted). In applying this doctrine, the Court referred to 26 U.S.C. § 6323(a). Id. This section protects "certain persons . . . against unrecorded federal tax liens," Don King Productions, Inc. v. Thomas, 945 F.2d at 533, and provides that "the lien imposed by section 6321 shall not be valid as against the purchaser, [or] holder of a security interest, . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary." 26 U.S.C. § 6323(a). "Only those persons specifically listed in the statute are entitled to priority over unrecorded federal tax liens." Don King Productions, Inc. v. Thomas, 945 F.2d at 533.
Section 6323(f) provides, in substance, that, if under the state law a deed is not valid against a bona fide purchaser unless its filing has been recorded in a public index, the tax lien is not valid against a purchaser unless the fact of its filing is recorded in a public federal tax lien index so that a reasonable inspection of the index will reveal the existence of the lien.
Burbano v. United States, 723 F. Supp. 193, 194 (E.D.N.Y. 1989).
"The question is whether [defendants Kelly and Mary McCombs] bought the premises free of the lien, and that turns on whether the United States provided notice of the lien in accordance with section 6323(f) before [defendant] made and recorded the purchase." Id., 723 F. Supp. at 195.
To provide notice in accordance with § 6323(f), the government must comply with New York's recording statute, N.Y. Real Property Law § 291.
In New York, a lien is considered a conveyance because it may affect "the title to any real property," N.Y. Real Property Law § 290(3), and thus it must be recorded.
The almost universal construction placed by courts upon the recording acts protects a subsequent purchaser as against a prior instrument if he pays value in ignorance of such instrument and makes the record of an instrument notice to the subsequent purchaser, irrespective of whether he actually examines the records so as to obtain such information.
Cohen v. East Netherland Holding Co., 258 F.2d 14, 17 (2d Cir. 1958) (construing N.Y. Real Property Law § 291). New York is a race-notice state. Goldstein v. Gold, 106 A.D.2d 100, 101, 483 N.Y.S.2d 375 (2d Dept. 1984), aff'd 66 N.Y.2d 624, 495 N.Y.S.2d 32, 485 N.E.2d 239 (1985). Therefore, "in order to cut off a prior lien, such as a mortgage, the purchaser must have no knowledge of the outstanding lien and win the race to recording office." Id., 106 A.D.2d at 101-102 (emphasis in original).
Subsequent purchasers may be charged with three types of notice in New York. The first is actual notice, which means that if an instrument is properly recorded, potential subsequent purchasers will learn of its existence upon actually searching the record chain of title. Witter v. Taggart, 78 N.Y.2d 234, 238, 573 N.Y.S.2d 146, 577 N.E.2d 338 (1991) ("The recording statutes in a grantor-grantee indexing system charge a purchaser with notice of matters only in the record of the purchased land's chain of title back to the original grantor"). Second, a properly recorded instrument also charges a subsequent purchaser with constructive notice of its existence. A subsequent purchaser is "not chargeable with constructive notice of conveyances recorded outside of that purchaser's direct chain of title. . ." Id., 78 N.Y.2d at 239. Third, the theory of inquiry notice provides that
[w]here a purchaser of land has knowledge of any facts sufficient to put him on inquiry as to the existence of some right or some title in conflict with that which he is about to acquire, he is presumed either to have made the inquiry and ascertained the extent of such prior right, or to have been guilty of a degree of negligence equally fatal to his claim to be considered as a bona fide purchaser.