Surprise liens

Chad R. Pomeroy (h/t TaxProf Blog) has written a scholarly article on the concept of “surprise liens” where a property buyer is unaware of a pre-existing lien because the lien, such as a federal estate tax lien, was never recorded at the courthouse. Here’s his eye-popping introduction:

Imagine you want to buy a house. You find the perfect place, exactly where you want to live, exactly the style you want. Like almost everybody, you do not have enough money to buy the house outright, so you need a mortgage. Getting a mortgage makes you nervous – you are taking on a principal obligation that is more money than you will make in the next five to ten years combined. But, everyone assures you, this is a safe financial decision – so long as you do not buy for speculation at the peak of a bubble, your newly purchased asset will adequately secure your obligation and ensure that you are not left responsible for an enormous debt if you suddenly lose your job or get sick. You are still nervous, though, about such a complicated and significant transaction, so you take the relatively extraordinary step of talking to a real estate lawyer. He says the same thing as your friends: your loan will be secured by your new house, and no bank will make a home loan to you unless you buy title insurance, which literally ensures that you will have clear title and that the bank will have a first-place protected interest in your new home.

That does it. Feeling confident, you take out the loan and buy the house. You move in and start to settle down. Then you get a letter from the Internal Revenue Service (“IRS”). Your house is subject to an estate tax lien and will be seized unless you pay the full amount of estate tax that is currently owed by the estate of the fellow who sold the house to the woman from whom you bought it. Frantically, you call your lawyer. This cannot be right, can it? The IRS cannot have a superior lien based on the taxes owed by the estate of somebody you never met and who owned the home more than five years ago, can it? The lawyer reviews the IRS notice and does some research. Red-faced, he tells you the IRS can, indeed, seize your new home, even though you bought title insurance and the title insurer examined the public records. He had never heard of the estate tax lien until now, but it gives the IRS an interest that does not have to be filed anywhere and that still takes precedence over your rights. You have been victimized by a “surprise lien.”

Pomeroy goes on to describe other circumstances where liens can come to light after buying a property, and the reasons why current law allows for this.  He concludes that although surprise liens have a long history and even have some advantages, such practices should be ended.

When Decatur sets a lien for unpaid property taxes, we are required to file that record with the DeKalb County Clerk of Superior Court.  Those records are available to anybody doing title research.