Eighth Circuit Rules that Federal Tax Lien Takes Priority Over Earlier Recorded Deed of Trust Due to “Significant Gap” in Recording of Refinance Loan

The United States Court of Appeals for the Eighth Circuit recently addressed the priority of a federal tax lien over several competing interests in a property, ultimately finding that an earlier recorded deed of trust lost its “first in time” priority after the property at issue was refinanced.  Applying Missouri law, the Court found that a 2006 refinanced loan deed of trust could not be considered part of the “same transaction” as an existing first priority 2004 deed of trust, because of a two month gap between the release of the 2004 deed of trust and the recordation of the 2006 deed of trust.  The opinion is notable for its interpretation of what constitutes a “contemporaneous” release and recordation under Missouri law.

In United States v. U.S. Bank National Association, the federal government brought suit to determine whether a tax lien recorded on March 30, 2006 on a foreclosed property had priority over an interest held by U.S. Bank National Association (“U.S. Bank”) via a deed of trust recorded on July 11, 2006.  U.S. Bank argued its 2006 deed of trust had priority over the tax lien because the 2006 loan merely refinanced a 2004 loan.

The Court explained that, ordinarily under common-law principles of “the first in time is the first in right,” a lien only has “first in time” priority after it has been “perfected.”  Under Missouri law, perfection of a deed of trust occurs when it has been recorded in the office of the recorder in the county where the property is located.  Further, it is the general rule that when a higher priority deed of trust is released, the next in priority moves up in priority.  There is an exception however, if a later recorded deed of trust is found to be part of the “same transaction” as an earlier recorded deed of trust.  In Missouri, determining whether the release of an old deed of trust and subsequent recordation of a new deed of trust form part of the same transaction requires assessing whether the release and recordation occurred “contemporaneously.”

The Court found that because the 2004 deed of trust was released on May 2, 2006, but the refinanced lien was not recorded until July 11, 2006, the release and recordation did not occur “contemporaneously.”  As a result, the government tax lien which was recorded on March 30, 2006 ascended to first priority.  In reaching this conclusion, the Court discussed a number of Missouri state court opinions, and noted that none of those cases found a “contemporaneous” release and recordation if a deed of trust was recorded after another was released.  Contemporaneous acts were only found when the release and recordation occurred on the same day, or if the recordation occurred before the release.

Ultimately, the Court found the two month gap to be a “careless practice,” regardless of the parties’ intent in refinancing the home.  Although limited to the Eighth Circuit’s interpretation of Missouri law, the opinion serves as a stark reminder that inadvertent recordation mistakes can be quite costly.