Court Finds Bank Of America Can Not Foreclose On Property Which Has Existing IRS Tax Lien

Tyler Durden's picture

Today's fraudclosure (remember that?) court ruling of the day comes once again from Florida, where in the case of Merrill Lynch Credit Corp vs Karin Lenz (Southern Florida case 09-60633) courtesy of yet another massive fumbled mortgage note discovery process, Judge Marcia Cooke has found that Merrill was not allowed to foreclose on a property that had an IRS tax lien on it, that a tax lien is found to have priority over a mortgage, and that in a nutshell the (presumed) mortgage servicer does not have standing to foreclose when the IRS is involved and demands its pound of flesh. This will be the latest cog rammed right up the wheels of the foreclosure process, as another hundred thousand or so mortgage will now likely be derailed as the IRS seeks to recoup tax revenues in a way that implicitly impairs banks, and further delay  foreclosures, now that there is affirmative case law precedent.

The key part from the Omnibus motion:

There is no evidence that the transfer of the Mortgage to Merrill Lynch was documented or recorded. Therefore, the only remaining inquiry left before this Court is whether the United States had notice of Merrill Lynch’s equitable interests before the Internal Revenue Service recorded the federal tax lien in 2005. There are three forms of notice recognized under Florida law: express actual notice, implied actual notice and constructive notice. Smith v. F.D.I.C., 61 F.3d 1552, 1557 (11th Cir. 1995). There is no dispute that the United States did not acquire express actual notice of the 2004 assignment of the Note until this action was filed. In addition, the United States did not have implied actual notice of the 2004 assignment. Implied actual notice is a factual inference drawn “from the fact that the person had a means of knowledge, which it was his duty to use and which he did not use” to uncover the information with which he is charged. Smith, 61 F.3d at 1588. “In order to charge a person with notice of information which might have been learned by inquiry, the circumstances must be such as should reasonably suggest inquiry. Id. (citing Rafkind v. Beer, 426 So.2d 1097, 1099 (Fla. Dist. Ct. App. 1983)). There can be no implied actual notice where a reasonably diligent inquiry outside of the record, if conducted, would not have revealed facts demonstrating the existence of an unrecorded interest. Id. Given the factual evidence before this Court, at best, a reasonably diligent inquiry outside of the record chain of title would have revealed that Merrill Lynch transferred the Mortgage into the REMIC and assigned the Note to Banker’s Trust in 1994. Such an inquiry would not have revealed that Merrill Lynch reacquired the Note and Mortgage in 2004.

Merrill Lynch argues that its interest in the Note and Mortgage is superior to that of the United States because it was in possession of the Note. Possession, however, does not constitute notice, constructive or otherwise. Tyler v. Johnson, 55 So. 870 (Fla. 1911). “Constructive notice is a legal inference, and it is imputed to creditors and subsequent purchasers by virtue of any document filed in the grantor/grantee index – the official records.” Smith, 61 F.3d at 1588 (citing Dunn v. Stack, 418 So.2d 345, 349 (Fla. Dist. Ct. App. 1982), rev’d on other grounds, 444 So. 2d 935 (Fla. 1984)). The official records provide “constructive notice to creditors and subsequent purchasers not only of its own existence and contents, but of such other facts as those concerned with it would have learned from the record, if it had been examined, and inquiries suggested by it, duly prosecuted, would have disclosed.” Zaucha v. Town of Medley, 66 So. 2d 238, 240 (Fla.1953).

Merrill Lynch claims that constructive knowledge of the previous recorded assignment is sufficient to assert priority over the federal tax lien. Merrill Lynch, however, lost the right to assert priority of that perfected security interest when it assigned and transferred the Note and Mortgage to Banker’s Trust. This cause of action is predicated on the equitable interests Merrill

Lynch acquired in 2004. The assignment recorded in 1994 does not provide a sufficient legal inference that would impute constructive notice of Merrill Lynch’s non-continuous interest in the Property.

In the alternative, Merrill Lynch also argues that it is entitled to priority over the federal tax lien because it has paid taxes on the Property since 2004. Unlike tax warrants and tax executions, tax payments are not recorded in the grantor/grantee index in Florida, and therefore are not part of the chain of title. See Klinger v. Milton Holding Co., 186 So. 526, 534 (1938). The inspection of tax assessor records is not a mandatory precondition to acquiring protected status under Florida’s recording statutes. Smith, 61 F.3d at 1559. “Such records consequently cannot give constructive notice.” Id., n. 14. Accordingly, the United States was not on notice of the 2004 transfer the Mortgage to Merrill Lynch, Merrill Lynch’s equitable interest is not a perfected “security interest” within the meaning of 26 U.S.C. § 6323(h)(1). The federal tax lien is therefore entitled to priority over the Mortgage.

And here is the description of how totally clueless Merrill, aka Bank of America, is when seeking to enforce mortgage rights. It is a miracle if the bank can actually track down any one particular mortgage.

On May 15, 2009, Karin and Randolph Lenz (the “Lenz Defendants”), Alass and Equity filed a Motion to Dismiss Merrill Lynch’s Complaint for Failure to State a Claim for Reestablishment of the Lost Note (“Motion to Dismiss”). [ECF No 4]. Merrill Lynch failed to oppose the Motion to Dismiss, even after this Court issued an order to show cause, and granted Merrill Lynch an extension of time to file a response in opposition to the Motion to Dismiss. [ECF Nos. 11, 12, 13]. On September 10, 2009, this Court granted the Motion to Dismiss as to the Lenz Defendants. [ECF No. 18].

During late 2009 and early 2010, Merrill Lynch essentially dropped out of this litigation and failed to respond to discovery requests, prompting the Lenz Defendants, Alass, and Equity to file a motion to compel Merrill Lunch to respond to discovery, which Magistrate Judge Ted E. Bandstra granted. [ECF Nos. 25, 31]. Further, Merrill Lynch failed to respond to Defendants’ interrogatories and requests for admissions. As a result, Merrill Lynch was deemed to have admitted that the United States’ tax liens were superior to Merrill Lynch’s Mortgage. See Fed. R. Civ. P. 36(a). Based on Merrill Lynch’s “deemed admissions,” the United States filed a Motion for Summary Judgment, contending that it was now undisputed that its liens were superior to those of all the other Defendants. [ECF No. 26]. On January 11, 2010, Merrill Lynch moved to withdraw its deemed admissions, which was subsequently denied. [ECF Nos. 33, 43]. On January 21, 2010, Merrill Lynch filed the original Note with this Court to support its claim for foreclosure. [ECF No. 40].

Notwithstanding having physical possession of the Note before filing the Note with this Court, Merrill Lynch’s counsel purportedly fell under the belief that Merrill Lynch was no longer the holder of the Note. Accordingly, Merrill Lynch filed a series of documents consistent with this belief, including a Notice of Voluntary Dismissal and a Motion for Return of the Promissory Note [ECF Nos. 58, 70]. On February 23, 2010, the Lenz Defendants, Alass, and Equity moved for summary judgment. [ECF No. 74].

In April 2010, Merrill Lynch purportedly realized that it was actually the holder of the Note and filed a Motion to Withdraw, Partially Strike or Serve Supplemental Authority. [ECF No. 100]. On June 15, 2010, this Court relieved Merrill Lynch of its deemed admissions regarding the issue of ownership of the Note and directed Merrill Lynch to seek leave to amend the Complaint “[i]f the discovery confirm[ed] that Merrill Lynch [was] the holder of the Note and Mortgage.” [ECF No. 111].

Pursuant to the Court’s modified Scheduling Order, “all fact discovery on the discrete issue of ownership of the Mortgage and the Note” was to be completed by July 12, 2010. [ECF No. 112]. Merrill Lynch filed its Motion for Leave to File an Amended Complaint on July 22, 2010, and claimed that discovery affirmatively established that Merrill Lynch reacquired the Note and Mortgage when it purchased the REMIC assets in 2004. [ECF No. 116]. On August 2, 2010, Merrill Lynch submitted its Motion for Summary Judgment, attaching as an exhibit an allonge documenting the transfer of the Note and Mortgage from Deutsche Bank, as successor trustee to Banker’s Trust, to Merrill Lynch. [ECF No. 123]. That same day, the Defendants also submitted Motions for Summary Judgment. [ECF Nos. 119, 122]. On August 25, 2010, this Court granted Merrill Lynch’s motion to file its Amended Complaint, which was duly filed on September 2, 2010. [ECF No. 138]. The Amended Complaint does not reference the allonge.

This ruling is merely the latest in the escalation of adverse finding that will soon explode despite the banks' ongoing attempt to keep the issue under wraps. Now that a broke Uncle Sam is involved, and realizes he can pick nickels and dimes ahead of the banks, we certainly expect all hell to break loose.

Full ruling link.