Defaulted commercial loans are not the only fallout from the recession. Many debtors – both businesses and consumers – have been tagged with tax liens for unpaid taxes of all kinds. As a lender with a security interest in the debtor’s property, how does the tax lien affect your secured interest? As with most questions involving the complicated machinations of the IRS, the answer is, it depends.
The general rule regarding priority of liens, including tax liens, is that a perfected security interest under the Uniform Commercial Code (UCC) has priority over a subsequently filed lien. Of course, when tax liens are involved, there are exceptions to the general rule, and we will discuss a few of those here. It also goes without saying that if you find yourself in a priority of liens dispute with a taxing authority, seek the advice of an attorney experienced in the nuances of financial and transactional law in your state, since many of exceptions to the general rule hinge on state law.
Federal tax law recognizes the ‘first in time, first in right’ rule regarding priority of property interests. Additionally, a lender with a properly perfected security interest will be allowed to trump an earlier federal tax lien as long as the loan or other advance was made by the lender without actual knowledge of a federal tax lien filing, and as long as the loan or advance is made within 45 days of the date the notice of tax lien was filed.
Key exceptions where a lender may lose priority status concern revolving credit or other line of credit arrangements, or any kind of financing secured by a business’s accounts receivable or inventory. This is because a tax lien immediately attaches to all of the taxpayer’s property, including real estate, personal property, financial assets, and after-acquired property. So, if a lender disburses funds to a borrower from a line of credit secured by the borrower’s accounts receivable after receiving notice of a tax lien, or after the 45-day window, then the tax lien would prime the lender’s security interest as to that disbursement.
Federal tax law allows ‘superpriority’ status for non-tax lien holders in specific situations, such as certain insurance contracts, deposit secured loans, purchase money security interests, certain commercial transaction financing agreements, and certain real property construction or improvement financing agreements, among others. In each instance, superpriority will attach absent certain circumstances.
If you are a lender with concerns regarding the priority of your security interest, consult with an attorney experienced in commercial lending and litigation. The attorneys at Glass & Goldberg provide high quality, cost-effective legal services and advice for clients in all aspects of business litigation, finance, and transactional law. Call us at (818) 888-2220, email us at firstname.lastname@example.org, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.