Priority of Liens
Until the Supreme Court decided United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), there was a conflict of authority as to:
A. Whether a lien of the United States should be subordinated to a later rival lien solely because state law affords priority to the rival lien; and
Kimbell Foods applied state priority law to consensual liens securing claims of the Farmers Home Administration and the Small Business Administration. In determining whether state law applies to liens arising from other federal programs, particular attention should be paid to the Court's three inquiries in Section III of the Kimbell Foods opinion:
B. Whether a rival lien, prior in time to a lien of the United States and entitled to priority under state law, should be denied priority if inchoate.
A. Whether the federal program at issue necessarily requires uniform federal rules.
B. Whether adopting state substantive law would frustrate specific objectives of the federal programs at issue.
In the case of loans made by HUD, the court in Chicago Title Insurance Co. v. Sherred Village Assoc., 708 F.2d 804 (1st Cir. 1983), held that mechanic's liens recorded under state law have priority over a prior recorded federal mortgage. Thus, HUD mortgages would appear to be in the same situation vis-a-vis priority of liens as SBA and FmHA.
C. The extent of disruption in normal commercial relationships caused by a uniform federal rule. If not persuaded that a special federal rule is required, the court may adopt the relevant state rule as the relevant federal law.
Courts have also applied the Kimbell Foods criteria in several cases involving local tax liens that have priority under state law and existing federal mortgages. In United States v. Dansby, 509 F. Supp. 188 (N.D. Ohio 1981) the court held that, although the tax lien was senior under Florida law, it could not operate "so as to destroy the pre-existing federal lien." See also United States v. David Friedland, et al., 502 F. Supp. 611 (D.N.J. 1980), aff'd, 672 F.2d 905 (3d Cir. 1981).
Where the consensual lien arises pursuant to a federal statute that prescribes a particular priority, that priority will be honored.
The Kimbell Foods court also suggested limits on its decision:
Adopting state law as an appropriate federal rule does not preclude federal courts from excepting local law that prejudice federal interests (citing cases). The issue here, however, involves commercial rules of general applicability, based on codes that are remarkably uniform throughout the Nation.
(440 U.S. at 736, n.37) This discussion does not undertake to cover the subject of tax liens. Guidance as to them should be sought from the Tax Division. Questions pertaining to non-tax, non-consensual liens (e.g., those based upon judgments, criminal fines, and statutory civil penalties) remain unresolved. For a further discussion, see Commercial Litigation Branch Monograph, Choice of Laws Decision in Federal Courts After Kimbell Foods.
The federal departments and agencies which make loans secured by liens on real and personal property will often pay state and local ad valorem taxes on the mortgaged property, if the borrower fails to pay them. Such payments by the government are sometimes required by statute and at other times are made as a matter of policy.
In light of Kimbell Foods, it is not clear whether or not taxes which are not ad valorem have this priority. Prior to Kimbell Foods, cases such as In re Lehigh Valley Mills, Inc., 341 F.2d 398 (3d Cir. 1965); United States v. Clover Spinning Mills Co., 373 F.2d 274 (4th Cir. 1966); Director of Revenue, State of Colo. v. United States, 392 F.2d 307 (10th Cir. 1968), held that taxes which are not ad valorem do not have this priority.
On occasion, owners or lienors of property on which the United States holds a lien may ask for release of the lien or of the government's right of post-sale redemption. No release should be executed without the receipt of some consideration. The agency's view should be requested in each case. The dollar amount of the authority delegated to the USA to compromise lien claims in actions under 28 U.S.C. § 2410 is equally applicable to the compromise of post-sale redemption rights of the United States under 28 U.S.C. § 2410(c). Cases involving tax liens, liens on a vessel or other maritime property, and liens arising from a criminal fine judgment or a judgment on an appearance bond, are expressly excluded from the Civil Division delegation of authority to USAs. If a release of a lien or right of redemption should be expressly limited to the precise property, lien or right of redemption which is the subject of the plaintiff's suit.
[cited in USAM 4-4.545] [Added March 1998]