legal notes
While the result in
Crystal Cascades may
have been favorable
for the lender, the case
is another example of
the uncertainty that
currently exists with
regard to determining
what constitutes a
reasonable search for a
federal tax lien.
In re Crystal Cascades Civil, LLC, 398
B.R. 23 (Bankr. D. Nev. Nov. 3, 2008) (A
federal tax lien notice that omitted part
of the debtor’s name was not effective
as against a subsequently perfected
secured creditor.)
Crystal Cascades Civil, LLC owned
real estate in Clark County, Nevada.
During the third and fourth quarters of
2003, Crystal Cascades failed to pay its
employment taxes and, as a result, in
August 2004, the IRS filed a notice of tax
lien against Crystal Cascades in the Clark
County recorder’s office. However, the
notice incorrectly identified the debtor
as “Crystal Cascades, LLC” rather than
by its correct legal name of “Crystal
Cascades Civil, LLC”. (Italics supplied)
In February 2005, after the IRS
recorded its notice of tax lien, Crystal
Cascades obtained a loan from Road
& Highway Builders secured by a lien
against the real property of Crystal
Cascades located in Clark County.
Highway Builders recorded a deed of
trust against the real property with the
Clark County recorder’s office.
In September 2005, Crystal Cascades
filed a Chapter 11 bankruptcy case and
sold the real property at an auction sale.
The net sale proceeds were insufficient
to satisfy both the federal tax lien in
favor of the IRS and the deed of trust in
favor of Highway Builders. As a result,
a dispute arose as to who, between the
IRS and Highway Builders, had priority
as to the remaining sale proceeds.
Under Revised Article 9 of the
Uniform Commercial Code, a financing
statement is valid against the holder of
a conflicting security interest only if a
search of the records of the proper filing
office using the exact legal name of the
debtor would uncover the financing
statement. By contrast, under the
Federal Tax Lien Act, a federal tax lien
is valid against the holder of a security
interest only if a “reasonable inspection”
of the records of the proper filing office
would uncover the federal tax lien
notice. In other words, when identifying
a debtor in a notice of tax lien, the IRS
does not need to satisfy the “precise
identification requirement” set forth
in Revised Article 9 of the UCC. Thus,
the issue before the Bankruptcy Court
was whether a reasonable search of the
records of the Clark County recorder
would have uncovered the errant tax
lien notice.
In Clark County, indexing is available
by an internet-based search engine that
allows searching by entity name. Under
this system, a search of the debtor’s
full legal name, “Crystal Cascades
Civil, LLC”, would not uncover the IRS’
notice of tax lien. However, a search
using the truncated name “Crystal
Cascades” would uncover the tax lien
notice. Accordingly, the IRS argued
that a “reasonable inspection” of the
records of Clark County would require
the searcher to search the name “Crystal
Cascades”.
In support of its position, the IRS
produced an expert witness who
testified that a professional title officer,
who is trained how to search the
public records, would likely search the
truncated name “Crystal Cascades” in an
effort to generate more search results
(and therefore would have found the IRS’
notice of tax lien). In other words, the
IRS argued that the standard for what
constitutes a reasonable search should
be determined from the perspective of a
professional title searcher. Rejecting this
argument, the Bankruptcy Court held
that the “reasonableness” of a search
is determined from the perspective of a
nonprofessional searcher as opposed to
a professional title officer.
The Bankruptcy Court then set out
to determine whether a reasonable
search conducted by a nonprofessional
searcher would have found the errant
tax lien. At trial, experts retained by the
IRS and Highway Builders each testified
