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.

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Obama2012's picture

about time the little guy gets some help.  won't last long with the good ol boys in charge.

traderjoe's picture

You've been here for 1 week 5 days. It appears you are the new ZH resident troll. Are you paid by the post?

66Sexy's picture

it's general knowledge that IRS liens take priority over any and all other liens against a property... even property taxes.

God is God, and thall shalt render unto ceasar that which belongs to ceasar.

knukles's picture

Well, it was once known that senior secured bond holders had priority over all others in the capital structure during bankruptcy proceedings (excepting newly established DIP financing, but another story for another time) until the US Government came along with GM and Chrysler.

The Significance is Not that the little guy gets Shit or Shinola, but that Rule of Law has Been Adhered To, Applied As Intended.

goodrich4bk's picture

There is nothing that the government did in either the GM or Chrysler case that hasn't been done thousands of times before by Wall Street investment bankers, DIP financiers and other private parties who provide the "new money" to confirm a Chapter 11 plan.  Yes, the bondholders were deprived up the upside of foreclosing on their assets and re-selling them to the Chinese for a profit, but that's what happens in every successful Chapter 11 case.  I see no reason for that "Rule of Law" to change just because the "new money" was, in the GM and Chrysler cases, the American taxpayer.

Ripped Chunk's picture

Indeed 66. Everyone gets in line behind Uncle. Everyone.

goodrich4bk's picture

I don't know how "general" such knowledge is, but you're dead wrong.  A Fed tax lien is JUNIOR to all prior recorded consensual liens.  When a senior lien forecloses, the Feds have merely a "right of redemption" for a fixed time (I think it is six months) to buy back the property from the lender.  But to excercise that right, the Fed must pay the lender the full amount of its loan, provided it made a full credit bid at the foreclosure sale.


Ratscam's picture

SHTF soon or a new Bill in Congress will be introduced with a delayed SHTF

Oh regional Indian's picture

Detonation People!

The Merchant of Venice. The bastard spawn of the illegal Fed will finally demand it's pound of flesh, exactly from where it hurts most.

Nail one, upcoming window of 9th through 14th.

CERN has a critical "Stranglet" test tomorrow as well.

Let us wish them ill-luck.



A Man without Qualities's picture

I wonder how much POMO money is being used to prop up BAC?

Lazarus Long's picture

ok it's official the American people are nothing more than a piece of meat to be fought over

Mariposa de Oro's picture

Exactly!  I had a mental image of two hyenas fighting over a carcass, only the carcass wasn't quite dead yet and was observing the spectical.

So sad....

Panafrican Funktron Robot's picture


Full ruling link.


Go go gadget - link!  Please, and thanks.

Panafrican Funktron Robot's picture

Yeah, this is going to have some pretty substantial implications on the commercial side as well.  I think what we'll see is continued price stability coupled with a further dropoff in sales.  Quantity of qualified buyers is only part of the problem; wait and see will continue to be the order of the day until "foreclosure liquidity" returns to the marketplace and we see true price discovery.

Kind of reminds you of the stock market, eh?

shushup's picture

Bullshit. They will just pay the lien and then foreclose.

They pay the tax liens after the foreclosure anyway.

Stupid that this is even an issue. The taxes always get paid.

goodrich4bk's picture

You're frickin wrong, dead wrong.  Under normal circumstances, a Fed tax lien is JUNIOR to a prior recorded consensual lien.  When the consensual lienholder forecloses, the Feds have a "right of redemption" for a fixed time (I think six months) to buy the property back from the lender by paying the lender its lien claim IN FULL.  So this case is huge.  It says that the Feds jump ahead of Merrill's prior recorded consensual lien because Merrill did not record the later assignment back. 

StychoKiller's picture

So, the way I read this is that by relying on MERS instead of using the county Recording process(es), the bank in question ended up screwing themselves in another fashion and opening themselves up to raids from the IRS barbarians!  Too bad, so sad! :>D

Yikes's picture

The wheels are coming off. What a cluster.

DonnieD's picture

This would seem to be a major problem for banks looking to foreclose since I would guess that a lot of people going through foreclosure are behind on their taxes.

As a side note, I spoke to a tax specialist who said the number of small businesses and proprietorships that are behind on their payroll taxes is very high.

Waterfallsparkles's picture

If they could not Foreclose while there is a Tax Lein then the People could be in their house for 10 years without paying a Mortgage.  In most cases the IRS does not Foreclose on a Tax Lein.

LowProfile's picture

Hmm...  Sounds like a backdoor forclosure moratorium to me!

New strategy:

Quit paying everything, go to (physical) cash & PMs, and alert the IRS that any future payments will have to be extracted from your home equity.

Mad Max's picture

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.

The allonge seems a little bit fishy to me.  Let's see that original note where every possible space to record transfers and assignments was used up by prior written transfers.

apachecadillac's picture

It's pretty safe to say that there will be an unending pattern in disputes between competing creditors and competing lienholders that the party that failed to record properly, or that is relying on documentation that is otherwise defective in some respect, will be poured out.  The politics of a living, breathing homeowner victim/deadbeat are simply absent in these situations.  The servicers, the trusts and the MBS holders are all going to pay the price for the shortcuts taken during the boom, and of course they are already turning on one another.

But the competing interests are too diverse to permit a one-off legislative solution.  Particularly with a gridlocked Congress.

StychoKiller's picture

At this rate, the SCO vs IBM case will be dead and buried before the M^3 (Massive Mortgage Mess) enters Act II!  Time to stock up on popcorn here.

Rainman's picture

It's hard to escape the irony of the banks and IRS fighting over the same dead carcass. While they're busy trying to screw each other, the jackal lawyers make off with the prized pieces of meat.

That's life in the jungle of fraud, I guess.

treemagnet's picture

TD - any guesstimates on when all this shit actually matters to Mr. Market?

w a l k - a w a y's picture

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.


Rube Goldberg would be proud of this contraption

fallst's picture

Regulatory capture. And Bubbilicious Fed. Now Greenspan even admitting bankRICO, to deflect.

Must still repeal both Gramm "Moderization Acts" from late 90's. They are loaded with lots of goodies. Especially the "Enron Loophole", or gas will go back to 150/BL.

iPood's picture

A recorded bank lien is not automatically subordianted to an IRS lien, although the IRS retain redemption rights. The general rule follows the order of recording.

Panafrican Funktron Robot's picture

Right, but if you can't produce the wet ink note, then the order of recording is irrelevant, you are officially the bitch in any discussion of who gets paid, and when they get paid.

StychoKiller's picture

LOL!!  Precisely right!  Oh, what a tangled web we weave, when first we practice to deceive!  By trying to automate the process of Recording titles, they completely  screwed the pooch, decapitated it and left it for dead here!

Buck Johnson's picture

Uncle Sam needs money, and they have to get their pound of flesh from the little guy because the big banks and corporations have paid so little but gotten so much.  And in this catch 22, the banks on the back end is paying more by being denied this if they would have paid taxes up front.  They have spun a web so intricate and so large, that even the spider can't get out of it.

Dokemion's picture

I had my home financed with Bank of America. I sent extra payments to be applied to principle (trying to pay off home early) No matter how I labeled payment slip, wrote on checks, and made several phone calls. It was posted incorrectly over and over. It took a lot of my time to get corrections each month. Corrections were then posted to account sometimes with a 2 week delay. I have sent complaints, but have had no resolutions. I spoke with Tiffany Stephenson Operations Consultant Office of the CEO and President Executive Customer Relations. I sent information she ask for, but instead of getting a resolution. My emails are now returned as undeliverable and phone calls are not returned. So just becareful and watch your account closely if you choose to use this bank. I learned the hard way. They are not interested in customer only the dollars.?

2lasi's picture


All the rules have changed in the last couple of months. Lending banks are now being held accountable for the trap they set, borrowing money they didn't themselves have, while using loose and illegal practices in the process. The massive lawsuit against Wells Fargo / Wachovia, Indymac / OneWest bank, Citibank, Bank of America, JP Morgan Chase, GMAC..............can actually, not only put a stop to your foreclosure, but also pause your house payments with no loss to you............