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Keith Maune
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249
THE EFFECTS OF COUNTY PERSONAL
PROPERTY TAX LIENS ON THE RIGHTS OF
SECURED CREDITORS
KEITH MAUNE
*
I
NTRODUCTION ......................................................................................... 249
I.
BACKGROUND ....................................................................................... 251
II.
THE FOUR PRIMARY DIMENSIONS OF STATE LAWS ............................ 252
A. Priority Variations ................................................................ 253
B. Discoverability Variations .................................................... 255
C. Scope Variations................................................................... 257
D. Apportionment Variations .................................................... 259
III.
CASE STUDIES .................................................................................... 261
A. Texas .................................................................................... 261
B. Tennessee ............................................................................. 264
C. Maryland .............................................................................. 267
IV.
THE BEST PRACTICE MODEL ............................................................. 270
A. The Model Rules .................................................................. 270
B. Priority .................................................................................. 271
C. Discoverability ..................................................................... 273
D. Scope .................................................................................... 274
E. Apportionment ..................................................................... 275
F. Summary .............................................................................. 276
C
ONCLUSION ............................................................................................ 276
I
NTRODUCTION
In most states, counties are allowed to tax personal property and
may attach liens to the personal property if the taxes are not paid.
1
* J.D., Summa Cum Laude, Belmont University College of Law (2017). I would like
to thank Professor Jeffrey Usman for his advice and feedback on my drafts of this Note and
the entire Belmont Law Review staff for their hard work and dedication in editing and
proofreading this Note.
1. See 50 State Statutory Surveys: Taxation: Collections and Remedies, Collection
Procedures, 0140 Surveys 1 (WestLaw, Oct. 2015) [hereinafter 50 State Survey]; Property
Tax - Chart Builder, B
LOOMBERG LAW, https://www.bloomberglaw.com/bbna/chart/2/1150
250 BELMONT LAW REVIEW [Vol. 4:1: 1
However, secured creditors may already have a lien on the same personal
property, which they perfected by making the appropriate filing as set forth
by the Uniform Commercial Code (the “UCC”).
2
The laws that control the
relative rights of the counties and the secured creditors vary widely among
states.
3
In some states, despite a creditor’s apparent priority under the UCC,
a county’s lien can override a creditor’s prior lien, even without any
registration or opportunity for the creditor to discover the county’s lien.
4
Some states also allow counties to attach liens to property in other counties
in the state.
5
The conflict between the rights of the counties and the rights of the
secured creditors comes up most often in the context of repossession by the
creditor.
6
When the creditor repossesses and liquidates its collateral, the law
often requires that creditor to repay delinquent taxes to the county.
7
However, the creditor may not even be able to discover if any taxes were
due until pursued by the county.
8
Furthermore, in some states, a creditor
who repossesses and liquidates collateral may be forced to pay the county
up to the entire amount to satisfy the taxpayer’s outstanding personal
property taxes, regardless of whether those taxes reflected amounts due on
that creditor’s collateral or whether it was based on taxes due on other
property.
9
(last visited Nov. 20, 2016). The WestLaw Survey provides a quick and convenient listing of
the tax-related statutes in each state. Note that some statutes refer to taxes levied by the state
government, but the listings also include all relevant statutes governing the collection of
county property taxes—the subject of this Note. The listings are simply arranged in
numerical order as codified and are listed with the section title. The Bloomberg Chart
Builder resource is much more helpful but takes a bit more effort to access and interpret. The
tool allows the user to select from a list of the fifty states (or allows selection of all fifty
states) and from a list of 141 “topics” relating to state property tax laws (each of these
“topics” is much more specific than the four broad “dimensions” of state law that will be
referred to in this Note). The items selected will become the rows and columns in a table.
The tool then generates a chart of the selected topics in the selected states. For example, the
available selections for topics include several that are relevant to the subject matter of this
Note: “Jurisdiction Imposing Tax,” “Situs,” “Foreclosures,” “Type and Creation of Lien,”
“Holder/Beneficiary of Lien, Lien Priorities,” “Actions for Personal Property,” and
“Property in Another County/State.” Each cell of the chart is populated with a snippet of any
applicable state law along with the statute reference. This Chart Builder tool is the best
starting point for researching the county tax laws for other states not discussed in this Note.
Note that neither resource includes any case law, however.
2. See T
HEODORE EISENBERG ET AL., 2B-24 DEBTOR-CREDITOR LAW § 24.04 (1982).
This is an expansive treatise on many areas of debtor-creditor law. Chapter 24, “Secured
Transactions,” provides an excellent overview of the topic.
3. See 50 State Survey, supra note 1.
4. Id.
5. Id.
6. Id.
7. Id.
8. Id.
9. See 50 State Statutory Surveys: Taxation: Collections and Remedies, Collection
Procedures, 0140 Surveys 1 (WestLaw, Oct. 2015) [hereinafter 50 State Survey]; Property
2017] COUNTY PERSONAL PROPERTY TAX LIENS 251
Because of the unpredictability and financial burden on creditors in
states with such laws, this Note argues that some states should reconsider
their current laws to more appropriately balance the interests of the
creditors with the interests of the counties. This Note argues for objectively
balancing the interests of the parties, keeping in mind the counties’
legitimate need to collect taxes while incorporating the creditors’ need for
predictability and fair treatment. In order to understand the perspective and
normal expectations of the secured creditors, this Note first examines how
their security interests usually work under the UCC absent any government
tax liens. Section I starts with explaining UCC Article 9, which governs
secured transactions in all fifty states, and the special type of security
interest known as a purchase money security interest (“PMSI”). The
Section will examine how Article 9 normally dictates priority among
secured creditors.
Next, in Section II, the state laws that control the rights of counties
and secured creditors are broken down into four dimensions: priority,
discoverability, scope, and apportionment. The Section examines each of
these four dimensions and explores the variations that exist among the
states. Next, in Section III, this Note analyzes the laws in several states that
have recently had changes in their laws related to personal property taxes.
This brings together the four dimensions to illustrate how they can be
combined in ways that are more favorable to counties or more favorable to
creditors. Finally, in Section IV, this Note presents the best practice model
that states ought to adopt to balance the interests of the counties and the
secured creditors fairly and explains why the proposed rules are the fairest
and most practical approach.
I.
BACKGROUND
Although a full discussion of secured transactions is outside the
scope of this Note,
10
a brief summary of basic rules is an important
backdrop to the discussion about county tax liens. Since these rules govern
the liens of secured creditors absent any government intervention, they help
to frame the normal expectations of the creditors. The Uniform Commercial
Code has been adopted in all fifty states, and Article 9 of the UCC provides
rules for the priority among creditors’ liens, known officially as “security
interests.”
11
A security interest is acquired by private contract between the
parties with the debtor signing a security agreement.
12
But, priority over
other creditors is based upon “perfection” of the security interest, which is
Tax - Chart Builder, BLOOMBERG LAW, https://www.bloomberglaw.com/bbna/chart/2/1150
(last visited Nov. 20, 2016).See 50 State Survey, supra note 1.
10. Numerous resources exist which can provide further information about the
Uniform Commercial Code. See generally E
ISENBERG ET AL., supra note 2.
11. Id. § 24.01.
12. Id. § 24.04.
252 BELMONT LAW REVIEW [Vol. 4:1: 1
generally accomplished by filing a UCC Financing Statement (a “UCC-1”)
with the registry that is maintained in each state.
13
Thus, perfection provides
notice to other creditors, since the registry is publicly searchable, and the
process provides a fair basis for determining priority.
14
Priority among
creditors is usually based simply upon first-to-perfect.
15
This is also called
first-in-time, but still refers to the first creditor to perfect (not necessarily
the first creditor to acquire the security interest via the security agreement),
thus providing notice to others.
16
A creditor can file a lien on a specific
piece of collateral, a category of collateral (e.g., all vehicles or all
inventory), or all property of the debtor (i.e., a “floating lien”).
17
The major exception to the first-to-perfect rule is with purchase
money security interests (“PMSIs”).
18
A PMSI is a special type of security
interest where the creditor provides the funds to purchase a specific piece of
property and the creditor takes a security interest in that property as part of
the purchase transaction.
19
For example, the lien that a bank acquires when
it loans money for the purchase of a vehicle could be filed as a purchase
money security interest.
20
The rules require that the money is directly
traceable to the purchase of the specific piece of collateral.
21
For example,
the bank could pay the dealer directly for the vehicle. The rules also have
strict filing deadlines to perfect a PMSI.
22
When a PMSI is timely
perfected, it takes priority over pre-existing security interests, even if, for
example, the existing security interest covered “all vehicles” or “all
property.”
23
This priority status makes sense since the preexisting creditor is
not in any worse position because of the subordination. After all, the
borrower would not have acquired the additional property but for the
money provided by the new creditor. The new creditor has used its money
to pay specifically for the new piece of collateral, so its security interest in
that collateral has priority under the UCC.
II.
THE FOUR PRIMARY DIMENSIONS OF STATE LAWS
Although the UCC Article 9 governs secured transactions among
private parties, state laws regarding county personal property tax liens can
and do override the UCC rules. In an attempt to make sense of the varying
state laws, this section analyzes these laws along four dimensions: priority,
13. Id.
14. Id.
15. Id.
16. T
HEODORE EISENBERG ET AL., 2B-24 DEBTOR-CREDITOR LAW § 24.04 (1982).
17. Id. § 24.01.
18. Id. § 24.06.
19. Id.
20. Id.
21. Id.
22. T
HEODORE EISENBERG ET AL., 2B-24 DEBTOR-CREDITOR LAW § 24.06 (1982).
23. Id.
§ 24.01.
2017] COUNTY PERSONAL PROPERTY TAX LIENS 253
discoverability, scope, and apportionment. These dimensions represent the
four major ways in which the laws affect the rights of secured creditors.
While the UCC laws that control the creditors are substantially identical
among the states, the state laws relating to county tax liens vary widely.
24
First, the laws vary in how they handle priority between the statutory
county tax liens and security interests controlled under the UCC, as
discussed in Section I. Second, the laws vary in terms of discoverability,
that is, how easily creditors are able to discover the existence of a county
tax lien. The third variation relates to scope: are counties able to attach liens
to the property assessed, or to all property in the county, or to property
outside their jurisdiction as well? Finally, the fourth variation is with how
apportionment is handled. In other words, can a county take the entire
amount due out of a single creditor’s collateral, even when that amount
exceeds the amount due on the repossessed property?
A. Priority Variations
While all private creditors play by the rules of the UCC, the
government has the option to override the normal priority rules for tax liens
but does not always choose to do so. The federal government, for example,
voluntarily conformed to the UCC priority rules with the passage of the
Federal Tax Lien Act of 1966, whereby federal tax liens are subordinated to
pre-existing perfected security interests.
25
Furthermore, the federal
government even sometimes recognizes the priority of subsequent PMSIs.
For example, the IRS permits subsequent PMSIs to take priority over an
existing IRS tax lien.
26
Although the federal government is sensitive to the interests of
secured creditors, including subsequent purchase money lenders, state
governments are usually less lenient. Many states do abide by first-in-time
rules but fail to recognize priority of subsequent purchase money
creditors.
27
This results in circular priorities since a subsequent PMSI has
priority over a preexisting security interest, and a preexisting security
interest has priority over the state’s tax lien. Yet, the subsequent PMSI does
not have priority over the state’s tax lien.
28
This is the case, for example, in
Tennessee, where the state may attach a lien to all property in the state as a
24. See 50 State Survey, supra note 1.
25. See I.R.C. § 6322 (1966) (showing IRS treatment of liens in conformity with
Federal Tax Lien Act).
26. I.R.S. Pub. No. 785 (2005).
27. See 50 State Survey, supra note 1.
28. To put this in mathematical terms, this is like saying A > B and B > C, yet A < C.
For a further discussion of this priority paradox in the context of Kentucky’s state tax lien
priority laws, which follows the majority rule as mentioned, see Richard H. Nowka, Whayne
Supply Co., Inc., v. Commonwealth of Kentucky Revenue Cabinet: Does Policy Prevail
Over the Plain Meaning of a Statute?, 24 N.
KY. L. REV. 273, 280 (1997).
254 BELMONT LAW REVIEW [Vol. 4:1: 1
result of delinquent taxes, but the lien is subordinate to security interests
that were perfected prior to the state’s filing of its lien.
29
The focus of this Note, however, is with the tax liens of counties,
where the priority rules of the UCC are respected least of all. In the
majority of states, the state legislatures allow counties priority over all other
creditors.
30
The exact language varies (“first lien,” “superior to all other
liens,” “priority over the claim of any creditor”), but the policy is clear: a
preexisting creditor who has a valid, perfected security interest can be
trumped by a county tax lien.
31
However, there are a couple of exceptions,
for example, Virginia and Wisconsin.
In Virginia, the statute provides that:
[a] security interest perfected prior to any distraint
32
for
taxes shall have priority over all taxes, except those
specifically assessed either per item or in bulk against the
goods and chattels so assessed. Taxes specifically assessed
either per item or in bulk against goods and chattels shall
constitute a lien against the property so assessed and shall
have priority over all security interests.
33
In one way, this is particularly generous to creditors because
priority is recognized not only for security interests perfected prior to the
assessment of the tax, but also for any security interest perfected prior to
distraint for taxes. However, the exception takes away most of the benefit;
since personal property taxes are assessed “in bulk against the goods and
chattels,” such taxes still have priority.
34
There is limited benefit, however,
in that taxes assessed on a specific class of property (e.g., motor vehicles)
do not constitute a lien against all of the debtor’s property.
35
Additionally, despite a clarification in the statutory language in
2001, courts continue to treat the lien as arising at the time of distraint. This
is an important distinction for creditors, who therefore retain the ability to
29. TENN. CODE ANN. § 67-1-1403(a), (c)(3)-(4) (2016).
30. This can be seen in the 50 State Survey or Chart Builder tool. See 50 State Survey,
supra note 1.
31. See, e.g., T
ENN. CODE. ANN. § 67-5-2101(a) (2016) (“first lien”); KY. REV. STAT.
ANN. § 134.420(3) (West Supp. 2015) (“priority over any other”); TEX. TAX CODE ANN.
§ 32.05(b)(1) (West 2015) (“priority over . . . the claim of any creditor”); N
EV. REV. STAT.
ANN. § 361.450(1) (2015) (“superior to all other liens”); MISS. CODE. ANN. § 27-35-1(1)
(West 2012) (“preference over all . . . liens”).
32. To “distrain” means to seize personal property. BLACK’S LAW DICTIONARY (10th
ed. 2014).
33. V
A. CODE ANN. § 58.1-3942(C) (West 2009 & Supp. 2016).
34. Id.
35. In re Ricketts Constr. Co., Inc., 441 B.R. 512, 516 (Bankr. W.D. Va. 2010)
(holding that an unpaid assessment on a motor vehicle constituted a lien only on the debtor’s
motor vehicles, and noting, “[i]f the General Assembly had intended to create such a
universal lien, it would not have limited scope of the lien to ‘the property so assessed.’”).
2017] COUNTY PERSONAL PROPERTY TAX LIENS 255
repossess the equipment before a county exercises its right of distraint. The
original language of the statute used the word “distrained” where it has now
been replaced with “so assessed”: “[t]axes specifically assessed either per
item or in bulk against the goods and chattels distrained shall have priority
over all security interests[.]”
36
In 2000, a federal bankruptcy court in
Virginia interpreted this language to mean that no lien attaches until the
goods are actually distrained.
37
In 2010, another division in the same district
revisited this statute, now revised as quoted above. The court acknowledged
that the statute was changed as a result of the interpretation in the 2000
case,
38
yet still noted that “[t]he Code of Virginia does not address
specifically when the lien arises. By implication, however, the lien arises
after the property has been seized through distraint.”
39
Another exception to the majority rule is found in Wisconsin. In
Wisconsin, the code is unusual in that it does not contain any provisions
regarding tax liens or distraint of personal property. Rather, the law simply
provides that “[d]elinquent personal property taxes . . . may be recovered by
the taxation district in a civil action[.]”
40
The law in Wisconsin seems to
give no special treatment to counties. There is no assertion of any lien,
much less a lien that takes priority over existing liens. The law even
provides for special approval by the county board before legal action is
commenced, as well as notice to the taxpayer about when and where the
meeting will be held to consider the legal action.
41
B. Discoverability Variations
In the majority of states, the lien on the personal property comes
into existence upon the assessment of taxes without any additional filing or
notice to other existing or future creditors.
42
Furthermore, there are usually
no laws requiring that counties respond to creditors even if they were to
query them directly.
43
The lack of discoverability of liens presents major
problems for creditors. First, the creditors are unable to fully assess the
creditworthiness of the borrower if they are not able to discover existing
liens as they make their decision about whether to extend credit. Creditors
36. In re Tultex Corp., 250 B.R. 560, 563 (Bankr. W.D. Va. 2000) (emphasis added
and removed).
37. Id.
38. Ricketts, 441 B.R. at 516 n.3.
39. Id. at 515 n.2.
40. W
IS. STAT. ANN. § 74.55(1) (West 2011).
41. Id.
§ 74.53(5).
42. For example, in Mississippi, “[t]axes (state, county and municipal) assessed upon
lands or personal property . . . shall be a lien upon and bind the property assessed.” M
ISS.
CODE ANN. § 27-35-1(1) (West 2012). Similarly, in Alabama, “when property becomes
assessable the state shall have a lien upon each and every piece or parcel of property[.]”
ALA. CODE § 40-1-3 (2011). For laws in other states, refer to the 50 State Survey, supra note
1.
43. See 50 State Survey, supra note 1.
256 BELMONT LAW REVIEW [Vol. 4:1: 1
can easily run queries against databases to discover federal tax liens, state
tax liens, and tax liens against real property.
44
However, they often are
unable to discover these personal property tax liens.
More commonly, a borrower may not have had any tax liens
initially, but the borrower later encounters liquidity problems. A borrower
that defaults on the loan to the creditor may often have unpaid personal
property taxes as well. In this scenario, if the creditor repossesses property
from that borrower, the creditor may not be able to discover whether or not
these priority liens exist. This leaves open the possibility that a county may
later demand that the creditor repay the proceeds from its repossessed
collateral. This unknown liability can be a critical issue to creditors since
the taxes due could wipe out their entire proceeds from repossession. In
such a case, a creditor would want to know ahead of time, since it could
save itself the trouble of pursuing the repossession.
Some states have addressed this problem either by mandating that
counties respond to queries from creditors or by establishing a statewide
registry. The statewide registry is the most helpful solution, allowing
creditors to check the registry both on the front end before extending credit
and upon repossession to determine whether delinquent taxes need to be
paid. Other states have implemented a statute mandating timely responses
from counties upon receipt of an inquiry from a creditor. A mandatory
response solution is far easier to implement but is only useful to query a
limited number of counties. Thus, it is not helpful for making a credit
decision on the front end and only provides a solution for repaying taxes
after repossession. Three examples of states that have attempted to address
the discoverability problem in one of these ways are Tennessee, Georgia,
and Maryland.
In Tennessee, legislation that was passed in 2010 implemented a
mandatory response system. The legislation required counties to respond to
queries from creditors within fifteen days.
45
If the counties do not respond
as to whether or not any taxes are owed, then the county waives its lien, and
the creditor may consider the lack of response notice that nothing is owed.
46
As will be discussed in Section III, creditors in Tennessee only need to
check with one or two counties, so this system of querying individual
44. A web search for the type of lien being sought is usually the easiest way to find the
appropriate site where any private party can execute a search. For example, Tennessee’s
UCC filings database is available to search online at
https://tnbear.tn.gov/UCC/Ecommerce/UCCSearch.aspx, and Tennessee real property tax
liens can be searched at http://www.assessment.cot.tn.gov/RE_Assessment/. Federal tax
liens must be registered in the state databases, making them easy to discover as well. 26
U.S.C. § 6323(f)(1)(A)(ii). Additionally, private parties provide services to allow for quick
nationwide lien searches rather than having to search many different state and county
databases. E.g., CT
LIEN SOLUTIONS, https://www.ctliensolutions.com/.
45. T
ENN. CODE ANN. § 67-5-1805(c)(4)(B)(iii) (2016).
46. Id.
2017] COUNTY PERSONAL PROPERTY TAX LIENS 257
counties is workable in Tennessee. However, it would be little help in other
states where creditors might have to check with every county in the state.
Georgia has implemented a statewide registry for personal property
tax liens. In Georgia, legislation first enacted in 1995 granted authority to
the Georgia Superior Court Clerks’ Cooperative Authority to establish a
“state-wide uniform automated information system for real and personal
property records[.]”
47
The system was mandated to be operational as of
January 1, 2004 and is now available on the web for public access.
48
Maryland has somewhat of a hybrid system. Under legislation
passed in 2013, the State Department of Assessments keeps a record of
“certified assessments” from counties, and creditors must contact each
county that has a certified assessment “in an amount equal to or greater than
the cost basis of the personal property subject to repossession by the
secured party” to determine whether any taxes are due.
49
The counties have
forty-five days to respond to the creditors or to dispute the valuation of the
repossessed collateral.
50
Discoverability is an essential dimension in determining the
fairness to secured creditors. Notably, however, this is the only dimension
that cannot be entirely controlled merely with the stroke of a legislative
pen. Although the intermediate solution of mandating responses from
counties can be accomplished simply by statute, the broader solution of
implementing a registry is far more involved. A statewide registry would
require the coordination and cooperation of potentially hundreds of counties
within a state. Therefore, the best and most practical solution to the
discoverability problem must be determined in the context of the other
dimensions. This will be explored further in the case studies in Section III,
as well as in the best practice model in Section IV.
C. Scope Variations
There is much variation among states regarding where personal
property liens attach. The messiness of this question stems from the nature
of personal property taxes. A comparison to real property taxes best
illustrates the issue: unlike personal property, there is a fixed, manageable
number of real property parcels in each county. Each real property parcel is
taxed for a specific amount associated with that individual piece of
property. If the tax is unpaid, the lien attaches to that particular parcel of
land. A registry of real property parcels is already maintained in each
47. 1995 Ga. Laws 260 (codified as GA. CODE ANN. § 15-6-97 (West 1995)).
48. Lien Index | Lien Searches | GSCCCA, T
HE CLERKS AUTHORITY,
http://search.gsccca.org/Lien/lienindex.asp (last visited Apr. 2, 2017).
49. 2013 Md. Laws 370 (codified as MD. CODE ANN., TAX-PROP. § 14-805(c)(2)(i)
(West 2002 & Supp. 2013)).
50. M
D. CODE ANN., TAX-PROP. § 14-805(c)(3)(ii)(1).
258 BELMONT LAW REVIEW [Vol. 4:1: 1
county, so liens for unpaid taxes can easily be noted within the same
registry, providing notice to any potential buyers.
Personal property requires different treatment for several reasons:
(1) there are too many pieces of personal property to give them individual
treatment; (2) personal property is more frequently bought and sold, so it
would be a hassle to take into account taxes with each sale, as is done with
real property; and (3) personal property does not remain in a particular
county but can be moved outside of the county or even outside of the state.
For these reasons, personal property is usually taxed by total value or value
by category. For example, businesses may have to report and pay taxes on
the value of all vehicles or the value of all office equipment. The taxes are
not necessarily associated with any specific items of property, and the
business is free to sell these items or move them across county or state
lines. Because of these challenges, in some ways, personal property tax is
treated as a tax on the particular business or individual, rather than being a
tax associated solely with the property.
In other words, there is close nexus between pieces of real property
and the taxes assessed on that property. When a payment is made, it is
applied against a specific parcel of real property. There is less of a nexus
between pieces of personal property and the taxes assessed on those pieces
of property. When a payment is made, it is applied against the overall
account for the taxpayer. There is no tracking as to whether or not taxes
have been paid on any particular piece of personal property.
Both real property taxes and personal property taxes are secured by
the underlying property of the taxpayer. However, real property taxes are
secured against a particular piece of real property. If the taxes on a
particular piece of property are unpaid, then, naturally, the lien attaches to
that particular piece of property. However, with personal property taxes, the
scope of what property the lien attaches to is more complicated. This
“scope” dimension, like all the other dimensions, varies among the states.
Because of the fact that personal property can be bought and sold, and
moved into or out of the county, some states choose to provide counties
additional scope in their liens.
The states that provide the least rights to counties grant liens only
on the actual property assessed. For example, the language in South
Carolina provides, “All taxes . . . shall be considered . . . a first lien in all
cases whatsoever upon the property taxed[.]”
51
One small expansion of this
limited scope for South Carolina counties is an automatic lien on
subsequently acquired property of a delinquent taxpayer.
52
In Florida, counties have slightly more scope in their liens. Similar
to South Carolina, the scope is initially “any property against which the
taxes have been assessed[.]”
53
However, if the property cannot be located in
51. S.C. CODE ANN. § 12-49-10 (2014) (emphasis added).
52. Id. § 12-49-30.
53. F
LA. STAT. ANN. § 197.122(1) (West 2014).
2017] COUNTY PERSONAL PROPERTY TAX LIENS 259
the county or the sale of the property is insufficient to pay the debt, the
scope expands to “all other personal property of the taxpayer in the
county.”
54
But, in the case of the expanded scope, Florida does not assert
priority against a lienholder and does not claim any liens against property
that has been sold.
55
Kentucky also provides liens “on the property assessed.”
56
However, this lien stays with the property even after a subsequent sale to a
bona fide purchaser.
57
Nevada counties have still more scope to their liens.
Counties start with a larger scope, receiving a lien “upon all property then
within the county.”
58
Furthermore, once the lien attaches, the lien stays with
the property, regardless of subsequent movement or even a subsequent sale
to a bona fide purchaser.
59
Other states allow for counties to attach liens in other counties
within the state. For example, North Carolina provides a procedure for
counties to file a “tax receipt” in another county, which effectively operates
as a lien,
60
and Alabama allows counties to file a lien in any other county
where property is located.
61
Broadest of all, in Mississippi, county tax liens
automatically attach “upon any personal property so situated or brought into
this state.”
62
This automatic attachment has a much greater effect on
creditors that may repossess property in other counties without notice of
any delinquencies.
D. Apportionment Variations
Apportionment refers to what portion of the delinquent tax a
repossessing creditor may have to repay to the county. As discussed in the
previous section, the differences between personal property as opposed to
real property also create difficulties regarding apportionment. Since
personal property taxes are often associated with a pool of property and
individual items are being bought and sold continuously, there is no direct
link between the tax lien and any particular item. A potential problem
therefore arises when a secured creditor repossesses its collateral and the
county demands repayment of the delinquent taxes from the proceeds.
Texas resolves the issue squarely in favor of the counties, declaring
that the tax liens are a “lien in solido,” meaning that each creditor is liable
54. Id.
55. Id. (“However, a lien against other personal property does not apply against
property that has been sold and is subordinate to any valid prior or subsequent liens against
such other property.”).
56. K
Y. REV. STAT. ANN. § 134.420(1) (West 2015).
57. Id. § 134.420(2).
58. NEV. REV. STAT. § 361.450(2) (2015).
59. 158 Nev. Op. Att’y Gen. No. 96-28 (Sept. 27, 1996).
60. N.C. GEN. STAT. § 105-364(b) (2008).
61. A
LA. CODE §§ 40-5-17, 40-5-31 (2011).
62. M
ISS. CODE ANN. § 27-35-1(1) (West 2012).
260 BELMONT LAW REVIEW [Vol. 4:1: 1
for up to the entire amount.
63
This may mean that a creditor repays to the
county the entire amount it receives from the sale of repossessed collateral,
even when that amount represents taxes assessed on other property that was
not the creditor’s. Many other states try to avoid this scenario. In Alabama,
a creditor typically only has to repay to a county the amount of taxes due on
the creditor’s collateral, provided that the debtor has sufficient other
property to cover the tax lien.
64
Georgia apparently has an apportionment rule as well, although
awkwardly phrased. The statute creates the apportionment through carefully
crafted priority rules. The initial rule in the statute is that “liens for taxes are
superior to all other liens[.]”
65
However, the statute gives an exception:
“The lien for any ad valorem tax shall not be superior to the title and
operation of a security deed when the tax represents an assessment upon
property of the taxpayer other than property specifically covered by the title
and operation of the security deed.”
66
Therefore, it appears that a prior
lienholder would have to pay only the taxes due which represent the
assessment upon its own collateral but not taxes due on other property.
North Carolina takes a similar approach to Georgia, solving the
apportionment problem through priority rules. Tax liens are superior to
other liens when they represent taxes imposed on that property.
67
However,
“[t]he tax lien, when it attaches to personal property, shall, insofar as it
represents taxes imposed upon property other than that to which the lien
attaches, be inferior to prior valid liens and perfected security interests and
superior to all subsequent liens and security interests.”
68
Again here,
because the creditor is only subordinate to the taxes imposed on its own
property, the statute effectively accomplishes apportionment.
Maryland’s tax code simply uses the term “pro rata,” making for a
much simpler statute that gives the same result.
69
The wording is probably
still sufficiently clear, given the common meaning of the term. The law
succinctly states that a creditor can satisfy a tax lien by “paying the required
pro rata portion of the personal property taxes due[.]”
70
Tennessee’s laws go even a step further. The apportionment is
described with the language: “The personal property taxes to be withheld
and paid . . . shall be determined by the valuation of only such personal
property that the secured party has sold[.]”
71
This is probably the clearest
language yet, since it avoids any potential argument about what “pro rata”
means, and it directly addresses what taxes are to be paid instead of
63. TEX. TAX CODE ANN. § 32.01(b) (West 2015).
64. A
LA. CODE § 40-5-12 (2011).
65. G
A. CODE ANN. § 48-2-56(b) (West 2011).
66. Id. § 48-2-56(d)(2).
67. N.C. GEN. STAT. § 105-356(b)(1) (West 2008).
68. Id. § 105-356(b)(2) (emphasis added).
69. MD. TAX CODE, TAX-PROP. § 14-805(c)(1)(i) (West 2002 & Supp. 2013).
70. Id.
71. T
ENN. CODE ANN. § 67-5-1805(c)(1) (2016) (emphasis added).
2017] COUNTY PERSONAL PROPERTY TAX LIENS 261
defining it indirectly through priority rules. Furthermore, the statute also
limits the secured creditor’s tax liability to only four years’ worth of taxes.
72
III.
CASE STUDIES
Having explored the four major aspects of state laws and some of
the variations that exist within each dimension, this Section now examines
the laws of specific states. This state-by-state look will better illustrate how
the variations in the four dimensions interact in combination with each
other. Priority is usually the most straightforward aspect. If the county
doesn’t have priority, then the creditor does not need to worry; however,
that is the minority rule.
73
Also, as discussed above, states sometimes use
priority rules to establish the idea of apportionment in a very non-obvious
way.
74
Potential issues with discoverability are closely linked to scope and
apportionment. Having a statewide registry is more important if liens can
attach statewide, whereas mandatory responses from counties can suffice in
states where liens stay within the county. Apportionment is a critical issue
as well, since creditor-friendly apportionment rules can significantly temper
other rules that are friendlier to the counties.
This Section looks at three states with three very different sets of
laws. Additionally, these three states are particularly interesting because
they have all had recent changes in their laws. Looking at these states and
their changes provides excellent insight into how laws can be designed to
more fairly balance the interests of counties and the interests of secured
creditors and how sometimes the results fall short of that objective.
First, this Section looks at recent events in Texas, where a 2012
court case interpreted the law controlling the scope of liens to be more
favorable for the creditors, and there is now pending legislation to change
the scope back to be more favorable to counties. Then, this Section looks at
Tennessee, where a 2009 court case interpreted the priority law to be more
favorable to the counties, and, in response, the legislature in 2010
completely revamped the laws regarding the other three dimensions of
discoverability, scope, and apportionment to be very favorable to creditors.
Finally, this Section examines Maryland, where the laws were also recently
revamped completely through legislation passed in 2013.
A. Texas
In Texas, as is the majority rule for the priority dimension, county
tax liens have “priority . . . over the claim of any creditor[.]”
75
The Texas
laws do not address discoverability, so creditors have no easy way to
72. Id. § 67-5-1805(c)(3).
73. See 50 State Survey, supra note 1.
74. See supra Section II-D.
75. T
EX. TAX CODE ANN. § 32.05(b)(1) (West 2015).
262 BELMONT LAW REVIEW [Vol. 4:1: 1
discover potential county tax liens. As is typical in many states, the lien
automatically attaches on January 1 of each year, and the lien is declared to
be perfected on attachment with no further action, notice, or registration by
the taxing unit.
76
The Texas state government website indicates that
“[c]ounty tax assessor-collector offices can answer questions about” taxes
due and provides a directory of the 254 different county tax assessors in
Texas.
77
In other words, a creditor that wanted a definitive answer about
potential tax liens would have to contact all 254 counties and even then
would not be guaranteed a response. Regarding apportionment, the Texas
Tax Code states that a tax lien is a “lien in solido,” meaning that a secured
creditor can be held liable to pay up to the entire amount.
78
The law does
not provide much clarification regarding the scope of the lien, but it does
provide an exception whereby “a tax lien may not be enforced against
personal property transferred to a buyer in ordinary course of business[.]”
79
In 1995, a secured creditor who repossessed its collateral attempted
to claim an exception under this “buyer in the ordinary course of business”
exception. The Texas Court of Appeals held that the exception did not
apply to a secured creditor and clarified the laws firmly in favor of the
county.
80
The Court held that the county’s personal property tax lien was
superior to the security interest of the secured creditor, regardless of
whether the security interest preexisted the tax lien, and even though the
county had not given notice to the secured creditor nor taken any action to
file the lien, foreclose the lien, or take possession of the property.
81
The
secured creditor was ordered to distribute its proceeds to the county.
82
A more recent development that clarified the scope of the liens
stemmed from the bankruptcy of Conquest Airlines, originally filed in
1996.
83
The debtor had personal property located in Travis County and in
Jefferson County.
84
The Travis County assessor filed claims for delinquent
taxes exceeding $500,000.
85
The dispute arose because the claims exceeded
the value of the personal property located in Travis County.
86
The Travis
County assessor claimed that the liens attached to all of the debtor’s
property, including that which was located in Jefferson County.
87
The
76. Id. § 32.01(a), (d).
77. Local Property Appraisal and Tax Information, C
OMPTROLLER.TEXAS.GOV,
http://comptroller.texas.gov/propertytax/references/directory/tac/ (last visited Apr. 2, 2017).
78. TEX. TAX CODE ANN. § 32.01(b).
79. Id. § 32.03(a).
80. Cent. Appraisal Dist. of Taylor County v. Dixie-Rose Jewels, Inc., 894 S.W.2d
841, 843 (Tex. Ct. App. 1995).
81. Id.
82. Id.
83. In re Conquest Airlines Corp., No. 96-10215-CAG, 2012 WL 2236717, at *1
(Bankr. W.D. Tex. June 15, 2012).
84. Id.
85. Id.
86. Id.
87. Id.
2017] COUNTY PERSONAL PROPERTY TAX LIENS 263
bankruptcy trustee contended that the Travis County claims could be
satisfied only from the property located in Travis County.
88
The court examined the language of the statute and initially
remarked that either interpretation was plausible.
89
The relevant language
provides:
On January 1 of each year, a tax lien attaches to property to
secure the payment of all taxes, penalties, and interest
ultimately imposed for the year on the property, whether or
not the taxes are imposed in the year the lien attaches. The
lien exists in favor of each taxing unit having power to tax
the property.
90
The court then looked at past wording of the statute and the
legislative history to try to determine the legislative intent behind the vague
wording.
91
The court found that prior to 1982, the statute was much clearer:
“All taxes shall be a lien upon the property upon which they are
assessed[.]”
92
That language clearly supported a scope limited to the
county.
93
In 1982, the language was changed to be very similar to the
present language: “On January 1 of each year, a tax lien attaches to
property to secure the payment of all taxes, penalties, and interest
ultimately imposed for the year on that property[.]”
94
In 1993, the language
was modified again, changing “that property” to “the property” as it now
reads.
95
For each successive change, the court found the legislative records
indicating either that there would be no fiscal implications of the change or
that the change was considered nonsubstantive.
96
From these records, the
court concluded that the meaning behind the words “property” and “the
property” in the current statute referred to the property being taxed by the
county.
97
Curiously, the court did not focus its attention on the following
sentence in the statute: “The lien exists in favor of each taxing unit having
power to tax the property.”
98
This seems to imply more clearly the scope of
88. Id.
89. Conquest Airlines, 2012 WL 2236717 at *2.
90. Id. (quoting TEX. TAX CODE ANN. § 32.01(a) (West 2015) (emphasis added)).
91. Id. at *3.
92. Id. at *4 (quoting T
EX. REV. CIV. STAT. ANN. art. 1060 (1963) (repealed 1982)
(emphasis added).
93. See id.
94. Id. (quoting T
EX. TAX CODE ANN. § 32.01(a) (1982), (current version at TEX. TAX
CODE ANN. § 32.01(a)) (emphasis added).
95. In re Conquest Airlines Corp., No. 96-10215-CAG, 2012 WL 2236717, at *5
(Bankr. W.D. Tex. June 15, 2012) (quoting T
EX. TAX CODE ANN. § 32.01(a)).
96. Id.
97. Id.
98. T
EX. TAX CODE ANN. § 32.01(a).
264 BELMONT LAW REVIEW [Vol. 4:1: 1
“the property,” limiting it to the property that was taxed by the particular
county.
99
Regardless, the court ultimately reached the conclusion that the
scope of the liens for Travis County was limited to the property within that
county.
100
This opinion was published by the court in 2012. In response to
this decision, in 2013, a bill was introduced to add the language
“irrespective of whether the personal property is located within the
boundaries of the taxing unit in whose favor the lien attaches” to the
statute.
101
The bill passed both houses of the legislature but was vetoed by
the governor in 2013; it was introduced again in 2015 but did not make it
out of the Senate Finance Committee.
102
In summary, Texas grants priority to counties over all secured
creditors. Counties only give up their lien on property that is transferred to a
buyer in the ordinary course of business. There is no discoverability
provision other than contacting each of the 254 counties in Texas. There is
no apportionment of taxes, so a creditor may have to repay to a county
taxes due on other property. Fortunately for creditors, the Bankruptcy Court
did interpret the statute as limiting the scope of a county’s lien to the
property located within that county. However, since that was the
interpretation of a federal bankruptcy court, there is still a risk that a Texas
court could interpret the existing statute differently. Furthermore, the bill to
amend the statute could eventually pass, explicitly expanding the counties’
scope to property statewide. Given the lack of discoverability and lack of
apportionment, an expansion of the scope would have a particularly
detrimental impact to secured creditors in Texas.
B. Tennessee
Tennessee’s priority statute appears to be another typical example
of the majority rule, which grants priority to counties. The law specifies that
tax assessments shall “become and remain a first lien upon such
property[.]”
103
In the event a secured party repossesses and sells its
collateral, “the party possessing the security interest shall withhold and pay
from the proceeds of the sale an amount sufficient to satisfy the personal
property taxes assessed[.]”
104
However, this seemingly straightforward
provision has been the subject of significant litigation over the years.
In 1980, a dispute arose between Commerce Union Bank and the
Commissioner of the Department of Revenue over proceeds from the
99. Id.
100. Conquest Airlines, 2012 WL 2236717 at *5.
101. S.B. 1606, 83d Leg., Reg. Sess. (Tex. 2013).
102. S.B. 50, 84th Leg., Reg. Sess. (Tex. 2015).
103. TENN. CODE ANN. § 67-5-2101(a) (2016).
104. T
ENN. CODE ANN. § 67-5-2003(h) (2016).
2017] COUNTY PERSONAL PROPERTY TAX LIENS 265
bank’s repossession and sale of an automobile.
105
Each party claimed its
lien had priority: the bank had a prior purchase money security interest, and
the Commissioner had a subsequent tax lien against the same property.
106
Although a different statute controlled at the time, the holding of the court
was not specific to the particular statutory language.
107
The court held that
in the case of a purchase money security interest, there is no period of time
during which the debtor acquires rights to the collateral.
108
Instead, the
debtor only ever has an “equitable interest” in the property.
109
Therefore,
the debtor never has an interest in the property to which a tax lien can
attach
110
and, consequently, purchase money security interests have priority
over tax liens.
111
In the end, Commerce Union Bank was allowed to keep
the proceeds from the sale of the repossessed automobile.
112
Even after the statute was changed to its current form, the holding
of that case regarding the attachment of liens continued to apply. So,
although the counties’ tax liens had priority over all general liens,
regardless of which was first-in-time, purchase money security interests
were treated differently. Since the taxpayer never had rights to property
secured by a purchase money security interest, counties did not have
priority over those secured creditors.
In 2007, another dispute arose, this time between Williamson
County and two secured creditors.
113
The secured creditors had loaned
money for the purchase of two tractors and had properly perfected their
purchase money security interests.
114
When the borrower defaulted, the
creditors repossessed and sold the tractors.
115
Williamson County asserted
that its “first lien” granted by the current statute had priority over the
creditors.
116
The chancery court, relying on the Commerce Union Bank
case, held that the purchase money security interests had priority over the
County’s tax lien and granted summary judgment to the creditors.
117
Williamson County appealed, and the Tennessee Court of Appeals
reviewed the issue of law de novo.
118
The court reexamined the current
105. Commerce Union Bank v. Possum Holler, Inc., 620 S.W.2d 487, 489 (Tenn.
1981).
106. Id. at 490.
107. Id. at 493.
108. Id.
109. Id.
110. Id.
111. Commerce Union Bank v. Possum Holler, Inc., 620 S.W.2d 487, 493 (Tenn.
1981).
112. Id.
113. State v. A & F Constr., No. M200800360COAR3CV, 2009 WL 499421, at *1
(Tenn. Ct. App. Feb. 26, 2009).
114. Id.
115. Id.
116. Id. at *2.
117. Id.
118. Id.
266 BELMONT LAW REVIEW [Vol. 4:1: 1
statute, and was apparently the first court to pay attention to a subsequent
section of the new statute.
119
In the section following the declaration of the
“first lien” was further clarification:
Such taxes shall be a lien upon the fee in the property, and
not merely upon the interest of the person to whom the
property is or ought to be assessed, but to any and all other
interests in the property, whether in reversion or remainder,
or of lienors, or of any nature whatever.
120
Based upon this language, the court of appeals found that lien attaches to
and has priority over the interest of the creditor as well.
121
The court held
that the chancery court had erred and that the County’s tax lien is superior
to all other liens, including purchase money security interests.
122
Interestingly, on appeal, one of the creditors tried to make an
argument in the alternative that again illustrates the interrelatedness of the
dimensions. The creditor argued that even if it lost the priority argument
and was liable to Williamson County, “any liability should be limited to the
pro rata amount specifically assessable against these particular tractors.”
123
The court declined to address this apportionment argument because it was
not decided in the court below.
124
Following this outcome, Tennessee’s legislature passed a bill
significantly revamping the personal property tax laws relating to secured
creditors.
125
Interestingly, the bill left untouched the newly enforced priority
rules. Counties in Tennessee still have absolute priority over all prior and
subsequent liens, including purchase money security interests. Instead, the
bill balanced out the new priority rule by addressing the other three
dimensions of discoverability, scope, and apportionment. Under the new
laws, a secured creditor can satisfy all potential tax liability by following
certain procedures.
126
First, the creditor must query the county of the
borrower’s domicile and the county where the equipment was
repossessed.
127
Then, any of three scenarios operates to satisfy all potential
119. State v. A & F Constr., No. M200800360COAR3CV, 2009 WL 499421, at *4
(Tenn. Ct. App. Feb. 26, 2009).
120. Id. at *4 (citing TENN. CODE ANN. § 67-5-2102(b) (2016)) (emphasis added).
121. Id.
122. Id. at *5. The secured creditors alternatively argued that Tenn. Code. Ann. § 67-1-
1403(c) established priority for preexisting liens. Id. The court, however, found that this
provision only applied to Tennessee state tax liens and not county tax liens. Id. at *6. As
noted earlier, states are more likely to respect first-in-time rules of the UCC (albeit not
subsequent purchase money security interests) themselves, although most states
simultaneously permit their county governments to disregard first-in-time rules entirely.
123. Id. at *7.
124. Id.
125. H.B. 3259, 106th Gen. Assemb., Reg. Sess. (Tenn. 2010).
126. T
ENN. CODE ANN. § 67-5-1805(c)(4)(A) (2016).
127. Id.
2017] COUNTY PERSONAL PROPERTY TAX LIENS 267
liability: (1) payment of taxes to the domicile county or the repossession
county; (2) receipt of a writing from the domicile county or the
repossession county indicating that the borrower appears on the tax rolls
and does not owe any tax; or (3) receipt of a writing from the domicile
county and the repossession county indicating that the borrower does not
appear on the tax rolls.
128
In all cases, payment of taxes consists of paying up to four years’
worth of taxes due based upon the value of the creditor’s collateral.
129
So
now taxes are not only apportioned, but limited to four years, which is
much more favorable to creditors than in most states. Also, failure of a
county to respond within fifteen days operates to satisfy option (2) or option
(3).
130
Therefore, discoverability is immensely improved for creditors as
well. Creditors now only need to check with one or two counties
(depending on whether the repossession county is different from the
domicile county) and are guaranteed a definitive answer within fifteen
days.
131
Regarding option (1), the law makes sense in requiring the creditor
to pay only the domicile county or the repossession county in order to avoid
making the creditor pay twice. However, it is interesting that apparently the
creditor has the choice as to which county it pays. Option (2) is even more
curious: according to the way the law is written, a creditor could receive a
response from one county indicating that the borrower appears on the tax
roll and does not owe any taxes and receive a response from the other
county indicating that the borrower does owe taxes. In this scenario, the
creditor is apparently absolved of paying any taxes because of the use of the
word “or” in the statute. It is not clear why this provision was not written
with an “and” instead.
In summary, the law in Tennessee was significantly changed in
2009 and 2010, even if there may be some minor corrections still needed.
The overall outcome is that counties now have a favorable ruling from the
courts regarding priority of their liens, but the creditors have new
legislation that provides significantly more rights to them regarding
discoverability of liens, the scope of the liens, and the apportionment of
taxes due.
C. Maryland
Maryland even more recently overhauled its personal property tax
laws through legislation passed in 2013.
132
Prior to the reform, the state of
affairs in Maryland was similar to Tennessee before the 2010 legislation.
128. Id. § 67-5-1805(c)(4)(A)(i)-(iii).
129. Id. § 67-5-1805(c)(1)-(3).
130. Id. § 67-5-1805(c)(4)(B)(iii).
131. Id.
132. H.B. 419, Gen. Assemb., 433rd Sess. (Md. 2013).
268 BELMONT LAW REVIEW [Vol. 4:1: 1
The tax liens were granted priority as a “1st lien” above all other liens,
including purchase money security interests.
133
There were no specific
provisions addressing discoverability, scope, or apportionment.
Repossessing creditors were expected to pay up to the entire amount of tax
liability of their borrower.
134
The original draft of the bill included language making county tax
liens subordinate to prior purchase money security interests.
135
The bill’s
sponsor noted, unsurprisingly, that counties responded negatively to this
proposition and expressed concern about their ability to collect their
taxes.
136
This provision was deleted from later drafts of the bill and did not
become law.
137
The bill that did pass contained many provisions similar to
Tennessee, along with a few improvements. The basic premise of the bill is
the same: give secured creditors a way to be released of all potential
liability by checking with certain counties and, at most, pay an apportioned
amount of taxes based upon the value of their collateral. The biggest
difference is that in Maryland, the creditor must inquire with every county
“that has a certified assessment by the State Department of Assessments
and Taxation for the business in an amount equal to or greater than the cost
basis of the personal property subject to repossession[.]”
138
Note that the
assessment amount refers to the value of the property, not the amount of tax
due.
139
In other words, the creditor must check with every county that has
taxed property worth at least as much as the creditor’s collateral. This
system addresses the issue of only checking with one or two counties,
which allows a creditor in Tennessee to potentially escape liability even
when taxes are due in another county.
Additionally, creditors in Maryland must send the inquiries to the
counties within sixty days of repossession,
140
whereas Tennessee has no
such requirement.
141
Perhaps creditors are still motivated to resolve any
133. MD. CODE ANN., TAX-PROP. § 14-805(b) (West 2002 & Supp. 2013).
134. Fiscal and Policy Note, D
EP’T OF LEGAL SERVS, MD. GEN. ASSEMB. (Feb. 13,
2013), http://mgaleg.maryland.gov/2013RS/fnotes/bil_0009/hb0419.pdf.
135. H.B. 419, Gen. Assemb., 433rd Sess. (Md. 2013),
http://mgaleg.maryland.gov/2013RS/bills/hb/hb0419f.pdf (first revision, dated Jan. 28,
2013).
136. Fiscal and Policy Note, supra note 134.
137. H.B. 419, Gen. Assemb., 433rd Sess. (Md. 2013),
http://mgaleg.maryland.gov/2013RS/bills/hb/hb0419E.pdf (with markup showing
amendments, including striking the subordination language on page 3, lines 13-17).
138. M
D. CODE ANN., TAX-PROP. § 14-805(c)(2)(i).
139. State Department of Assessments & Taxation (SDAT), M
ARYLAND.GOV,
http://www.dat.state.md.us/about/Pages/default.aspx (last visited June 1, 2016)
(“Assessments are certified by the Department to local governments where they are
converted into property tax bills by applying the appropriate property tax rates. An
assessment is based on an appraisal of the fair market value of the property.”).
140. M
D. CODE ANN., TAX-PROP. § 14-805(c)(2)(i).
141. See T
ENN. CODE ANN. § 67-5-1805 (2016).
2017] COUNTY PERSONAL PROPERTY TAX LIENS 269
potential liability as soon as possible, but it seems possible that creditors
might sometimes delay in hopes that the borrower is able to pay the taxes.
Another timing difference is that Maryland counties have forty-five days to
respond,
142
whereas Tennessee counties are only given fifteen days.
143
Although fifteen days seems like a short period of time, counties should
have these numbers readily available. One possible issue is that counties
may want to dispute the value of the property as asserted by the creditor, so
they may need additional time for an appraiser to review the matter before
responding.
Maryland also addresses the issue of which county should be paid
when taxes are due to more than one county. In Tennessee, the creditor
apparently gets to pick,
144
but in Maryland a hierarchy is specified in the
statute: first priority is the county of the principal office of the business, and
second is the county of repossession.
145
If taxes are not due to either of
those counties, then they may be paid to any other county to which taxes
are owed.
146
If more than one other county is owed taxes, then the amount
due is prorated among those counties, based on the total amount due to each
county.
147
But, in any case, the amount the creditor must pay to any county
or combination of counties is limited to the amount due based upon the
value of that creditor’s collateral. Unlike Tennessee, there is no limitation
to four years’ worth of taxes.
148
A key feature of the Maryland statute is that if a creditor does not
follow the procedures to proactively pay the appropriate counties, then the
creditor can still be held liable for the entire amount of taxes due.
149
In other
words, the benefit of apportionment is conditioned on the proactive and
timely payment to the appropriate counties. This is unlike Tennessee, where
the penalty for noncompliance is simply that “[a] secured party selling the
property who fails to withhold and pay such amount shall be held to be
personally liable for such amount[.]”
150
This seems to create a temptation
for creditors not to contact the counties and hope to go undetected since
there is no additional penalty for getting caught later. The worst case
scenario is having to pay that which was due anyway. Maryland cleverly
addresses this issue by conditioning the apportionment benefit on the
creditors’ proactive inquiry and payment of taxes.
142. MD. CODE ANN., TAX-PROP. § 14-805(c)(3)(ii)(1).
143. T
ENN. CODE ANN. § 67-5-1805(c)(4)(B)(iii).
144. Id. § 67-5-1805(c)(4)(A)(ii).
145. M
D. CODE ANN., TAX-PROP. § 14-805(c)(4)(ii)(1)-(2).
146. Id. § 14-805(c)(4)(ii)(3).
147. Id. § 14-805(c)(4)(ii)(4).
148. Id.; T
ENN. CODE ANN. § 67-5-1805(c)(3).
149. M
D. CODE ANN., TAX-PROP. § 14-805(c)(5).
150. T
ENN. CODE ANN. § 67-5-2003(h) (2016).
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IV.
THE BEST PRACTICE MODEL
Having examined the four main dimensions of the law and the laws
that exist in a few states, the question remains as to what states should do.
What is the proper balance between the rights of the counties and the rights
of the secured creditors? This Section begins by setting forth the model
rules in Subsection (A), which is the combination of laws that most fairly
strikes this balance. Then, Subsections (B) through (E) contain discussion
about each of the four dimensions as implemented in the model rules and
explanations for why those rules were selected.
A. The Model Rules
(a) Priority. From the date property tax on personal
property is due, any unpaid amount shall constitute a first
lien on the property of the taxpayer in the amount due. This
lien has priority over all other liens, including pre-existing
liens and purchase money security interests.
(b) Scope. The lien as provided in Section (a) shall
attach to all property of the taxpayer located in this state.
The lien shall automatically attach to any additional
property the taxpayer may acquire after the date that the
lien initially attached. The lien shall not attach to property
sold to a bona fide purchaser.
(c) Discoverability. A secured party may obtain an
official notice of tax due from a county by sending a
request in writing to the county trustee that includes the
name, address, and taxpayer identification number of the
taxpayer. In the event the secured party sends such a
request via U.S. certified mail and does not receive a
response within [thirty] ([30]) calendar days, the signed
return receipt shall constitute a notice that no tax is due.
(d) Apportionment. In the event a secured party
repossesses property of a taxpayer with delinquent personal
property taxes, the maximum liability of the secured party
shall be determined based solely on the value of the
personal property that the secured party repossessed and
the tax rate applicable to the owner of such personal
property. This amount shall be referred to as the
“apportioned share of taxes.” Notwithstanding this section,
a secured party may be liable for the entire amount due,
2017] COUNTY PERSONAL PROPERTY TAX LIENS 271
without apportionment, if the secured party fails to comply
with Section (e).
(e) Secured Party’s Duty to Inquire and Pay Taxes.
(1) Within [thirty] ([30]) calendar days after a secured
party repossesses personal property of a taxpayer, the
secured party shall send inquiries as described in Section
(c) to the county of the taxpayer’s domicile (the “domicile
county”) and, if the personal property was not repossessed
in the domicile county, to the county in which the personal
property was repossessed (the “repossession county”).
(2) If the secured party receives a notice from the domicile
county that the taxpayer owes taxes to that county, then
within [thirty] ([30]) days of receiving such notice, the
secured creditor shall pay to the domicile county up to its
apportioned share of taxes.
(3) If the secured creditor receives a notice from the
repossession county that the taxpayer owes taxes to that
county and the secured creditor’s liability under the
preceding paragraph (2) is less than the full amount of its
apportioned share of taxes to the domicile county, then
within [sixty] ([60]) days of receiving such notice, the
secured creditor shall pay to the repossession county any
taxes due, up to a total amount of its apportioned share of
taxes when combined with any amount already paid to the
domicile county.
(4) A secured party that complies with this provision shall
not be liable to any other county in the state and the
repossessed property shall be free of all liens as provided in
Section (a).
(5) In the event the secured party fails to send the inquiries
or to pay the taxes due as required under this section, then
the amount the secured party owes shall not be apportioned
as provided in Section (d), and instead the secured party
shall be liable for the full amount of taxes due.
B. Priority
The first and most critical issue is priority, and the model rules
unequivocally adopt the majority rule of priority for counties’ liens. As
discussed in Section I, the federal government and most state governments
272 BELMONT LAW REVIEW [Vol. 4:1: 1
at least respect first-in-time rights but counties rarely do. A possible reason
for this difference is that counties have fewer resources and tools to go after
delinquent taxpayers, so they need blunter tools with which to collect their
revenue.
Additionally, state and federal taxes are often based on income of a
particular person or business, whereas the county property taxes are ad
valorem, meaning they are based upon the value of property. When a tax is
based upon income, there is less of a basis for a tax lien to have priority
over secured creditors. This is because the secured creditors had no direct
connection to the income of the taxpayer and there is no particular reason
why an income tax lien should be collected from them. An income tax debt
is completely personal to the taxpayer, and thus the expectation is for the
state or federal government to let the secured creditor maintain its lien
priority and not have to repay such a debt.
On the other hand, when a tax is associated with a piece of property
rather than a particular owner, there is a basis for the tax liability to remain
with the property upon repossession. With real property taxes, when the
debt is clearly associated with a particular piece of property, there is a
reasonable basis for requiring a repossessing creditor to pay taxes that were
due on that property. The tax was related to that property, and it is fair to let
the tax remain with the property. This is particularly true since
discoverability is not an issue with real property, so the purchaser has
notice and can account for this liability when determining the purchase
price.
However, examining the way personal property taxes operate, they
are a hybrid between being a tax on a particular entity and a tax on specific
pieces of property. Because the tax is applied to entire categories of
property and not specific items, the liability is more personal to the
taxpayer and only loosely associated with particular pieces of property.
This creates the dilemma on whether to create priority rules more similar to
real property taxes or more similar to income taxes.
Ultimately, because personal property taxes are in fact ad valorem
taxes just like real property taxes, even though the association with the
property is looser, allowing the lien to stay with the property and have
priority over all other liens is more practical. This is because counties do
not have the resources to pursue delinquent taxpayers through other means
and rules that take away lien priority of counties would be met with
significant pushback, as was the case in Maryland. Furthermore, the
detriment to creditors from this rule can be mitigated with complementary
rules regarding apportionment and discoverability that are favorable to
creditors, as seen in the model rules. However, if priority was taken away
from counties, that detriment could not be counterbalanced through other
rules. Therefore, the practical and most fair solution is to allow counties to
have a favorable priority rule.
2017] COUNTY PERSONAL PROPERTY TAX LIENS 273
C. Discoverability
Regarding discoverability, if cost were not an issue, clearly the
ideal scenario is to setup a statewide registry as Georgia has done. Or, as in
Maryland, at least have some centralized place to query for initial finding of
a delinquency, even if further inquiry has to be made at the county level.
With a proper way for creditors to determine on the front end if the
borrower is already behind in taxes and to stay alert to problems as they
might develop, imposing priority of county liens is more justifiable. What is
most fair often times is simply a matter of having proper notice. If creditors
had an easy way to discover these liens, they can adjust their practices
accordingly.
However, Tennessee’s solution of limiting the scope of the liens to
one or two counties and then requiring prompt responses from those
counties is a quick and easy way to solve the discoverability problem as
well. However, the system is only designed to solve the problem on the
back-end, when a creditor is repossessing collateral and needs to find out
what is due to counties. It does not address the problem on the front end
when assessing the borrower’s credit. Additionally, for large businesses that
operate across several counties, a secured creditor could escape liability if
the business owes taxes to a county other than its domicile county or the
repossessing county. This could be a scenario that would occur seldom
enough that it would not be worth the cost of implementing the more
comprehensive solution of a statewide registry. In the majority of cases,
borrowers will owe taxes in their domicile county or to the county of
repossession, if they owe taxes anywhere.
Because of these reasons, the model rules adopt the Tennessee
approach of implementing only mandatory responses from counties. The
model rules suggest a timeframe of thirty calendar days for creditors to send
their inquiries to the counties after repossession, and they provide thirty
days for the counties to respond to the creditors before a non-response
constitutes a waiver. The rules also require a secured creditor to pay the
domicile county within thirty days of receiving a response indicating that
taxes are due. The rules provide a total of sixty days for a creditor to pay
the repossession county, since the secured creditor will need to wait for
thirty days to elapse to know whether it will have any liability to the
domicile county first since payment to the domicile county takes priority.
The sixty day timeframe provides the secured creditor thirty days to make
the payment to the repossession county after the maximum time it could
take to have a definitive answer (either a response or a waiver) from the
domicile county.
The thirty-day timeframes are bracketed, since the exact number is
somewhat arbitrary and states may choose to adjust this number within
reason. The timeframes should be long enough that they do not create a
burden on creditors or counties, while being as short as possible to provide
274 BELMONT LAW REVIEW [Vol. 4:1: 1
certainty for creditors and prompt payment to counties. The thirty-day
timeframes are comfortably within the reasonable range, but states may
decide to make the timeframes shorter (as Tennessee did using fifteen days)
or longer (as Maryland did using forty-five days). Additionally, states could
perform a study to try to determine how much revenue is lost by
implementing this system versus a statewide registry and could consider
implementing the registry if cost justified.
D. Scope
Ultimately, the extent of discoverability limits what is fair to
impose regarding scope of the liens. If there is easy statewide
discoverability, then it is reasonable to let the lien stay with the property
statewide. If, however, discoverability is limited to querying individual
counties, then it must be paired with a law limiting scope to particular
counties. But, with a proper apportionment system, the scope of the liability
can be even simpler: impose statewide liability whenever any taxes are due
anywhere without attempting to track individual pieces of property. Under
such a system, it would be possible that at times taxes would be assessed on
property and paid to a county where that property was never physically
located. This system, however, has the practical advantage of simplicity.
The model rules adopt a system where the scope is initially
statewide. However, a secured creditor can effectively limit the scope to the
taxpayer’s domicile county and the repossession county by following the
procedures specified to query those counties and pay any taxes due. The
scope becomes limited to those counties without regard to whether the
collateral property was ever actually assessed in that county. For example,
even if the property was moved into the county the day before repossession,
the secured creditor would still have to pay taxes due to that county, if any.
In this case, the delinquent taxes would represent amounts due on other
property. However, the county would still have a valid lien since its lien
automatically attached to the property regardless of its location. Despite this
possible anomaly, this system is very straightforward and predictable for
counties and secured creditors.
Discoverability also impacts the fairness of whether the lien should
stay with the property upon transfer to a bona fide purchaser. Although
outside the scope of this Note, some states have specific rules or registries
for valuable pieces of personal property such as mobile homes, vehicles,
and other heavy machinery. Proper notice to a purchaser is essential to
imposing liability fairly. Secured creditors can be expected to be aware of
personal property tax laws and the liability they may be exposed to.
Individual purchasers, however, will rarely consider this possible liability.
The model rules simply include a rule that the lien does not attach
to property sold to a bona fide purchaser. States could fairly create
2017] COUNTY PERSONAL PROPERTY TAX LIENS 275
exceptions to this rule when an appropriate registry exists, and the rule is
sufficiently well-known so as to provide reasonable notice to purchasers.
E. Apportionment
The model rules adopt the rule of apportionment, where a secured
creditor only has to repay the taxes due on the collateral it repossessed.
However, limiting the taxes due to four years, as done in Tennessee, is
unnecessarily lenient on the creditors. The limitation of four years is even
more lenient than seen with real estate tax liens, where a creditor would
owe all taxes due on that parcel of property. The model rules require a
creditor to pay the taxes due based upon the value of the creditor’s
collateral, calculated from the earliest point in time at which the borrower
became delinquent on taxes and was in possession of the property up to the
full amount due.
This system benefits the counties by applying any partial payments
from the taxpayer to other property and maximizing the amount to be
recovered from the secured creditor. To illustrate what this means, imagine
that a taxpayer owned $10,000 worth of property outright and free of lien
and owned another $10,000 worth of property that was subject to a lien.
Now, say that this taxpayer owed $200 in property taxes on its $20,000 of
property (based upon a one percent rate across all property), but the
taxpayer only made a payment of $100. If the creditor repossessed its
property, the creditor could argue that the $100 that was paid represented
the $100 due on its $10,000 of collateral, leaving nothing for the creditor to
repay. Or perhaps, the creditor could argue that the $100 should be applied
evenly across all the property, so that only $50 is still due on its $10,000 of
collateral, and $50 is still due on other property.
Although there is an argument for such a system, it would become
unduly complicated to calculate and would be unnecessarily generous to the
creditors at the expense of the counties. Again here, fairness to creditors is
based upon notice and predictability of the result. With a proper
apportionment system, discovery of preexisting delinquencies becomes less
important because a creditor would not be held liable for those amounts due
on other property (and the creditor has plenty of other ways to determine
creditworthiness). Additionally, the creditor knows the maximum liability it
would ever incur due to a failure of its borrower to pay any taxes. In the
example above, based on the model rules, the creditor would still owe $100,
representing the amount of tax due on its collateral. This is regardless of
any partial payments from the taxpayer, with the exception that the secured
creditor would never have to pay more than its apportioned amount.
The model rules also address the allocation of payments to the
domicile county and the repossessing county to preclude the anomalous
scenarios possible under the Tennessee statute. The model rules give
priority to the domicile county with payment to the repossession county
276 BELMONT LAW REVIEW [Vol. 4:1: 1
only if the domicile county is paid in full and the secured creditor has not
yet paid up to the apportioned amount due. There is no particular reason
why the domicile county should have priority over the repossession county
but having some definite priority makes the process simpler to implement.
A state could choose to swap the priorities and the result would be fair as
well.
The model statute only provides for payments to the domicile
county and repossession county and not any prorated allocation among
other various counties as included in the Maryland statute since the model
statute does not include a statewide registry system. If a state chooses to
implement a statewide registry, payments to other counties should of course
be required. In that scenario, perhaps a payment priority system based upon
largest amount due would be simpler than requiring prorated payments to
potentially many different counties.
Finally, the model rules adopt Maryland’s system of conditioning
apportionment on creditors making timely inquiries and payments as
required under the rules. This compromise is a great option for states
without apportionment laws already. However, in states that do already
have apportionment laws, placing such a condition upon an existing benefit
would undoubtedly be met with significant pushback from creditors.
F. Summary
In summary, the model system grants counties priority over all
other liens. Liability would be imposed based on broad authority for
counties to claim statewide liens. Because a statewide registry of liens may
be expensive to implement, the model rules implement mandatory
responses from counties to provide for discoverability. Although the scope
of the liens is initially statewide, secured creditors would have the ability to
limit liability to the domicile county and repossession county by proactively
querying those counties and paying any taxes due. If the creditor complies
with those requirements, the amounts due would be apportioned based upon
the amount of taxes due on the creditor’s collateral.
C
ONCLUSION
States have widely varying laws that define the relative rights of the
counties that impose tax liens on personal property and the rights of the
secured creditors that loaned money for the purchase of that personal
property. Each state’s laws are unique but can be analyzed along four
primary dimensions: priority, discoverability, scope, and apportionment.
These laws are an area where counties and creditors continue to have
conflicts, sometimes leading to changes via court decisions and sometimes
prompting legislative reform.
2017] COUNTY PERSONAL PROPERTY TAX LIENS 277
States should be careful not to unfairly balance the rights of
counties and creditors, and legislative reform should comprehensively
consider all four of the dimensions. An ideal system can give priority to
counties but will also provide a way for creditors to discover tax liens.
Additionally, the scope of the liability can fairly be imposed statewide,
provided that the liability is apportioned based upon the value of the
creditor’s collateral. Such a system benefits counties in many ways but
provides notice and predictability to creditors.
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