In Beal Bank v. United States, typographical errors in a property’s legal description recently cost an Idaho bank its lien priority status in favor of the U.S. government as tax creditor.
Frederick and Cheryl Hively secured a residential property via warranty deed from the seller in September 2004. On the same day, Cheryl Hively transferred her interest in the property to Frederick Hively via a quit claim deed. Mr. Hively financed the purchase of the property by executing a promissory note and deed of trust with Beal Bank.
However, both the warranty deed and the quit claim deed contained typographical errors in the legal description of the property. Those errors also appeared in the deed of trust that created the bank’s security interest.
In 2009, the IRS filed a notice of federal tax lien against the Hivelys. Subsequently, the bank filed an action in state court seeking to correct the defective deeds. That action was removed to the federal court, where the U.S. government filed a motion to dismiss on the grounds that its lien had priority.
A competing prior lien can only retain its priority over a federal tax lien if the competing lien is “choate” (i.e., perfected) at the time the federal tax lien arose. If the prior lien is not perfected, the federal tax lien has priority.
In its August 20, 2015, ruling, the Idaho federal district court sided with the U.S. government, finding that the bank’s lien was not choate when the IRS filed its tax lien against the property. The court noted that under Idaho law, a property description must be exact in defining the identity and boundaries of the property. The court emphasized that “a state lien that is unperfected under state law will virtually never qualify as choate under the federal standard.”
The court said that the fact the property description was erroneous and that the bank sought to correct the legal description demonstrated that the lien was not choate. Therefore, the competing federal tax lien was entitled to priority.
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