In the case of Wells Fargo Bank, N.A. v. Svenby, 118 AFTR 2d 2016-5751 (September 8, 2016), the U.S. District Court for the Middle District of Alabama held that Wells Fargo's replacement mortgage had priority over a Federal tax lien recorded prior to the recordation of the replacement mortgage but after the recordation of the initial mortgage.

The timeline was as follows:

  • August 7, 2008: The taxpayers acquired the property subject to a Wells Fargo mortgage of $203,000.
  • August 26, 2008: Wells Fargo records the $203,000 mortgage.
  • November 15, 2012: The IRS executed a tax lien against the taxpayers.
  • November 19, 2012: The taxpayers gave a second mortgage to Wells Fargo. The amount of the second mortgage was $192,869. The second mortgage was to secure a first priority lien on the property; the funds were used to pay off the $203,000 mortgage.
  • November 28, 2012: The IRS recorded its tax lien.
  • December 4, 2012: Wells Fargo cancelled and released the taxpayers' $203,000 mortgage.
  • December 10, 2012: Wells Fargo recorded the release of the taxpayers' $203,000 mortgage.
  • December 20, 2012: Wells Fargo recorded the $192,869 second mortgage.

A tax lien attaches to all property owned by a person who fails to pay taxes owed to the IRS. I.R.C. § 6321. While a tax lien arises when the IRS assesses a tax liability against a taxpayer, the tax lien is not valid against another security interest until: (1) notice of the tax lien is recorded; and (2) a grace period of 45 days from the date of the recordation has passed. Federal law governs whether a federal lien has priority over a competing lien. In making that determination, federal law follows the maxim "first in time is first in right." The priority date is based on when the lien is specific and perfected, meaning the date the amount of the lien is established.

Wells Fargo contended that it had an existing security interest because Wells Fargo's interest was protected against unsecured creditors prior to the IRS's recordation. In so arguing, Wells Fargo contended that the second mortgage was a replacement mortgage of the first $203,000 mortgage. The court reviewed Alabama case law considering the priority of replacement mortgages. In reviewing these cases, the court found that the key inquiry was the intent of the parties – specifically, whether the parties intended to release or replace the original mortgage. In this instance, Wells Fargo and the taxpayers presented evidence that the replacement mortgage was intended to restate the balance due and the parties intended the replacement mortgage to be a first lien purchase money mortgage. Accordingly, the court held that, because the parties intended that the second mortgage be a replacement of the first, Wells Fargo retained a security interest "which was not removed when the initial mortgage was released." Therefore, Wells Fargo had priority over the Federal tax lien.

The holding in Wells Fargo emphasizes that many tax lien priority cases turn on the provisions of local law. Here, the court focused on the fact that Alabama case law required an analysis of the parties' intent, as opposed to merely a review of the filing timeline. Practitioners in similar situations should review local law to determine whether a similar replacement mortgage concept could be applicable.

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