A recent U.S. district court case held that, under Texas law, federal tax liens are valid when filed, not when indexed. The case is Ibraham E. Hanafy v. United States, 81 AFTR2d Par. 98-438, No. 3:96-CV-2957-X. The facts of the case are as follows. The IRS filed a notice of federal tax lien in the Johnston County, Texas clerks office on August 20, 1996 against real property owned by the Roses. Ten days later the Roses transferred a warranty deed to Ibraham Hanafy. However, when the deed was transferred to Hanafy, the federal lien had not been indexed in the countys computerized indexing system. Therefore, the federal tax lien was not discovered in title searches conducted July 31 and August 29, 1996.
Hanafy paid the Roses tax liability to avoid foreclosure on the property and then sued the IRS for wrongful levy, claiming that Texas law required the federal tax lien be indexed to be valid. The district court judge granted the United States motion for summary judgement, relying on a 19th century case (Throckmorton v. Price, 28 Tex. 606 (1866)) and rejecting a 1992 case (Harriman v. United States, No. H-91 3283 (S.D. Tex. July 7, 1992)) which took a contrary position. The judges decision was based on the policy consideration that requiring indexing to validate a tax lien would subject the IRS to the prejudices of recording personnel. The judge also found that Texas recording statutes meet due process constitutional standards.
The holding in the Hanafy case seems contrary to North Carolina law. In North Carolina, as in Texas, federal tax liens are to be filed in the office of the clerk of superior where the real property in question in located (N.C.G.S. § 44-68.12(b)). N.C.G.S. § 44-68.14(a)(2) addresses the duties of filing officers other than the Secretary of State: "Any other officer described in G.S. 44-68.12, he shall endorse thereon his identification and the date and time of receipt and forthwith file it alphabetically or enter it in an alphabetical index showing the name and address of the person named in the notice, the date and time of receipt, the title and address of the official or entity certifying the lien, and the total amount appearing on the notice of lien." Therefore, to be valid against any purchaser, holder of a security interest, mechanics lienor or judgment creditor, a federal tax lien must be properly indexed to be properly filed.
N.C.G.S. § 161-22 addresses the requirements of recording instruments in the Register of Deeds; it requires proper indexing in order for instruments to be properly registered. The case of B. C. Cuthrell v. Camden County, 118 S. E. 2d 601, 254 N.C. 181 (1961) addresses this issue. In Cuthrell, Mollie Cuthrell and her husband owned property as tenants by the entirety, and upon her husbands death, she became the owner of the property in fee simple. In 1950 a deed of trust was conveyed to secure a note executed by Ms. Cuthrell. When the deed of trust was indexed, Ms. Cuthrells name was not included in the grantors index; the deed of trust was indexed as "R. G. Cuthrell et al." In 1952 an old age assistance lien was filed against Mollie Sawyer Cuthrell. In 1960, after it was discovered that the deed of trust was not indexed in the name of Mollie Cuthrell, the deed of trust was indexed against Ms. Cuthrell. The court held that the lien had priority over the deed of trust as it was properly indexed first. The court stated that "Indexing of deeds is an essential part of registration, and the indexing of judgments is an essential part of docketing." Id. at 602. The court stated that "The primary purpose of the law requiring the registration and indexing of conveyances is to give notice, and it has been repeatedly stated by those writing on this subject that an index will hold a subsequent purchaser or encumbrancer to notice if enough is disclosed by the index to put a careful and prudent examiner upon inquiry, and if upon such inquiry the instrument would be found." Id. at 603.
National Surety Corp et al. v. Sharpe et al. 72 S.E. 2d 109, 236 N.C. 35 (1952) addresses the issue of priority of federal tax liens. This case dealt with a partnership, Carthage Weaving Company, which went into receivership, At the time the receiver was appointed, the partnership was indebted to several creditors, including numerous judgment creditors and the United States for income taxes in the amount of $30,148. The court noted that unrecorded federal tax liens have priority over all persons except "as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed ." Id. at 120. The court also noted that "Under Section 3672 of Title 26 of the United States Code Annotated, the date of the filing of the notice of a federal tax lien controls in a controversy respecting priority as between the United States and a judgment lien creditor, a mortgagee, a pledgee, or a purchaser." Id at 121. Therefore, the federal tax lien in the present case did not take priority over the other mortgages and liens that were filed before the federal tax lien was filed.
Based on the holdings in Cuthrell and National Surety and the statutes which address the requirements for proper recordation and filing, proper indexing is required in order to have proper filing in either the clerk of superior courts office or in the Register of Deeds. As a result, it appears that the holding in the Hanafy case would not stand in North Carolina, since the federal tax lien had been filed but not indexed when the title searches were performed.
However, the IRS in Greensboro, North Carolina takes a position contrary to both the North Carolina statutes and the North Carolina cases. The IRS says that a federal tax lien only has to be filed to be valid; indexing is not required. The IRSs position supports the holding of the Hanafy case in that it says the IRS should not be at the mercy of the clerks office to insure that federal tax liens are indexed in the proper or a timely manner.
At Statewide Title, we take the position that North Carolina law controls this issue and that proper indexing is required before a lien is valid. However, based on the holding in the Hanafy case and the IRSs position, there is uncertainty in this area. Therefore, in addition to checking for indexed federal tax liens, a prudent title examiner should also check for federal tax liens which have been filed but not yet been indexed. Most clerk of court offices keep a file of liens which have been filed and need to be indexed; it would be wise to inquire about where this information is kept and to check it when completing title examinations. It is also important to report all federal tax liens to Statewide Title on your title opinion and to give your opinion as to the liens priority.
Special thanks to Clinton Forbis of Forbis and Grossman in Kannapolis for bringing the Hanafy case to our attention.