Hidden Liens Report, a project of the Commercial Transactions Committee of the Business Law Section of The State Bar of California
II. List and Discussion of Hidden Liens
E. Tax and Other Governmental Liens

1. Federal tax liens arising under the Internal Revenue Code against "all property and rights to property, whether real or personal" that belong to the taxpayer, 26 U.S.C. Section 6321.37

Statutory Framework of The Federal Tax Lien:

Section 6321 of the Internal Revenue Code (26 U.S.C. § 6321) provides:

lf any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

IRC § 6322 specifies the time at which this federal tax lien arises and its duration. IRC § 6223 sets out important rules concerning the validity and priority of the lien vis-à-vis various parties, including a secured party holding a security interest subject to Division 9 of the California Uniform Commercial Code. Section 6325 sets forth rules concerning the release of the lien.

How The Federal Tax Lien Arises:

IRC § 6321 states that failure to pay a tax due the United States after demand shall be a lien in favor of the United States against any property and rights to property of such person. Section 6322, however, states that "the lien imposed by Section 6321 shall arise at the time the assessment is made."

Sections 6321 and 6322 appear inconsistent insofar as they suggest two different points for the attachment of the federal tax lien: Section 6321 speaks in terms of demand and failure to pay while Section 6322 speaks in terms of time of assessment. Notwithstanding such apparent inconsistency, case law is uniform in holding that Section 6322 fixes the attachment of the federal tax lien as of the date of assessment. See, e.g., U.S. v. Donahue Industries, Inc., 905 F.2d 1325, 1330-31 (9th Cir. 1990); Noriega & Alexander v. U.S., 859 F.Supp. 406. 409 (E.D. CA 1994). At the same time, the courts have also been clear that a demand for payment is required for the lien to be effective. See, e.g., In re Bertelt, 206 B.R. 579, 582 (Bankr. MD Fla 1996); Ind. Lumbermens' Mut. Ins. Co. v. Construction Alternatives, Inc., 161 BR 949, 951 (Bankr. S.D. OH), affd. 2 F.3d. 670 (6th Cir. 1992). The apparent inconsistency between Section 6321 and 6322 can be reconciled first by recognizing that Section 6322 specifically addresses the time the lien arises while the broader language of Section 6321 addresses the requirements for the lien to be effective. A demand and failure to pay are the requirements to the validity of a tax lien, but the lien reaches all property of the taxpayer existing as of the "time of assessment" or arising thereafter.

IRS Form 4340 Certificate of Assessment and Payment is presumptive evidence that taxes have been duly assessed. See, e.g., Hefti v. I.R.S., 8 F.3d 1169, 1172 (7th Cir 1993); But see, Huff vs. U.S., 10 F.3d 1440, 1445-46 (9th Cir 1993) cert. denied, 512 U.S. 1219 (1994). (IRS could not rely solely on Form 4340 to prove valid assessment where form did not specify date on which assessment was made).

Perfection of Federal Tax Lien:

Section 6323(a) provides that unless the IRS has recorded a notice of tax lien that complies with Section 6323(f), a tax lien will not be valid against (i.e., have priority over) the interest of a purchaser, holder of a security interest, mechanic's lien or judgment lien creditor. The filing of a notice of tax lien is required only to obtain priority over the classes of interests specified by Section 6323(a): the priority of the tax lien over other liens and interests (e.g., state tax liens) are determined under the principles of "first in time" and "choateness" without regard to a notice of the tax lien filing. (See discussion under "Priority of Lien").

Section 6323(f) sets out rules on the content and place for filing the federal tax lien notice. Section 6323(f)(3) states that the form and content of the notice are to be prescribed by the Secretary, and -- of paramount significance -- that the notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of a lien. Section 6323(f)(5) states that the filing of a notice of tax lien is governed solely by the Internal Revenue Code. These provisions of Section 6323(f) make clear that the rules concerning the form, content and place of filing of the notice of tax lien contained in Section 6323 and the regulations promulgated hereunder preempt both state law -- including the California Uniform Commercial Code -- and other federal law.

Preemption of state law poses a number of challenges to the practitioner representing a secured party seeking to confirm the priority of its Article 9 security interest:

Priority Risks Associated with Debtor's Name:

A secured party seeking to perfect a security interest under Division 9 through the filing of a financing statement must use the debtor's correct name as specified in CUCC 9-503 in the filing statement. Pursuant to CUCC 9-506(c), an error in the name of the debtor is not necessarily fatal to the effectiveness of the financing statement if a search of the records under the debtor's correct name using the filing office's standard search logic would disclose the financing statement. However, if a search using the filing office's standard search logic would not disclose the financing statement, it is "seriously misleading" and is not effective to establish the secured party's priority.

The sufficiency of the debtor's name in a notice of tax lien is not subject to the strictures of the filing office's standard search logic imposed by CUCC 9-506(c). Instead, the sufficiency of a debtor's name in a notice of tax lien is governed by a more lenient standard: whether a reasonable and diligent search would disclose the notice of the tax lien. While a practitioner need only conduct a search under the debtor's correct name using the filing office's standard search logic to search for other security interests governed by Division 9, the practitioner may be required to conduct searches using variants of the debtor's correct name to search for notices of federal tax lien. See, e.g., In re Spearing Tool and Mfg. Co., 412 F.3d. 653 (6th Cir 2005), cert. den., 127 S.Ct. 41 (2006). Thus, failure of a search under the debtor's correct name as specified by CUCC 9-503 using the filing office's standard logic to disclose a notice of tax lien is not a sufficient basis to conclude that a tax lien is not entitled to priority.

Priority Risks Associated with Place of Filing:

Section 6323(f) prescribes different rules for the place of filing with respect to real property and personal property.

For real property, the notice is to be filed in the one office as designated by state law in which the real property is physically located. In California, the filing office is the county recorder's office.

For personal property, the notice is to be filed in the one office designated under the laws of the State of the taxpayer's residence at the time the notice is filed. A corporation or partnership is deemed to reside at the location of its principal executive office of business.

While Section 6323(f)'s place of filing rules for personal property was intended to correspond to the plan of filing rules under the Uniform Commercial Code, the rules do not correspond to the revised Uniform Commercial Code now enacted. Under Section CUCC 9307, a "registered organization" is located under the state of the laws under which it is organized, not the jurisdiction of its principal place of business. Thus, a Delaware corporation is located in Delaware notwithstanding that its executive offices and principal place of business are located in California, and the practitioner must search for competing security interests in Delaware. This difference in filing requirements means that for "registered organizations" such as corporations and most partnerships, the practitioner must conduct a search for a notice of tax lien not only in the filing office of the state under which it is organized - - where all other security interests are recorded - - but also in the filing office of the state in which the taxpayers' principal executive office of business is located in order to capture notices of tax liens.

Priority Risks Associated with Change in Taxpayer's "Residence":

A notice of tax lien is effective for a period of ten (10) years and thirty (30) days from the date of assessment, but can be renewed by refiling during such period. The IRS is not required to refile its notice of tax lien within the ten (10) year period based on a change in the debtor taxpayer's residence. Thus the practitioner cannot rely on searches of the filing office of the state of the debtor's current residence, but must conduct searches in the state of the debtor's prior residences, i.e., all former principal executive offices of business.

Priority of Federal Tax Lien:

The federal tax lien has existed, in one form or another, for over one hundred years. Prior to the Federal Tax Lien Act of 1966, the priority of the federal tax lien vis-à-vis other liens, was determined under the common law principles of "first in time is first in right" and "choateness". Application of these principles to resolve priority of lien rights proved problematic for secured lenders, particularly a lender sought to rely on a "floating lien" on accounts and inventory because the consensual lien could not attach and enjoy priority as to accounts and inventory not then in existence. As a consequence, a tax lien was deemed to have priority over existing security interests in accounts and inventory arising or acquired after the time the tax lien came into existence. In enacting Section 6323, Congress sought to achieve a certain balance between the rights of the United States and the rights of other lienholders -- including the lender with a "floating lien" -- that would accommodate the needs of commercial finance as well as other societal interests.

Section 6323(a) states the first basic rule of priority of the federal tax lien:

The lien imposed by Section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanics lien or judgment lien creditor until notice thereof which meets the requirement of subsection (f) has been filed.

Section 6323(a) requires the IRS to "perfect" its lien by filing a notice of tax lien to enjoy priority, but only where the competing interest is that of a purchaser, holder of a security interest, judgment lien creditor or mechanic's lien. The priority of other liens, notably state tax liens and other statutory liens, is still determined under the common law principles of "first in time" and "choateness".

Sections 6323(b) through (d) delineate the priority of the tax lien where a notice of tax lien has been filed. Each of these subsections is discussed in further detail below:

Section 6323(b) is a quiltwork of special priority rules based on the nature of the collateral and/or the nature of the competing lien or interest. The provisions of 6323(b) provide separate rules for:

  • Securities (b)(1)
  • Personal Property purchased at retail (b)(3)
  • Personal property subject to possessory lien (b)(5)
  • Residential property subject to mechanic's liens (b)(7)
  • Insurance Contracts (b)(9)
  • Motor Vehicles (b)(2)
  • Personal property purchased at retail sale (b)(4)
  • Real property, taxes and assessments (b)(6)
  • Attorneys liens (b)(8)
  • Deposit-secured accounts (b)(10)

Section 6323(d) provides a limited priority for a security interest which comes into existence by reason of disbursements made before the 46th day after the date of filing of the notice of the tax lien. In order to enjoy priority under subsection (d):

  • The disbursements must be made without actual notice or knowledge of the tax lien;
  • The security interest must be covered by the terms of a written agreement entered into before the tax lien filing;
  • The security interest is in property subject to the tax lien at the time of the tax lien filing; and
  • The security interest is protected under local laws (e.g., Division 9 of the California Uniform Commercial Code) as of the time of the tax lien filing against a judgment lien arising from an unsecured obligation.

In sum, Section 6323(d) will provide continued priority for advances made without knowledge of the tax lien with the first 45 days after the tax lien filing in property existing as of the time of the tax lien filing. The priority provided by Section 6323(d) is limited to property existing as of the tax lien filing and does not extend to property acquired or coming into existence after the filing: priority does not extend to accounts or inventory acquired or arising within the 45 day period after the tax lien filing.

Section 6323(c)

In contrast to Section 6323(d), Section 6323(c) provides priority as to both disbursements made and property acquired after the tax lien filing, but only for certain transactions. In order to obtain priority under Section 6323(c), a security interest must satisfy four requirements:

  • The security interest must have priority under local applicable law against a hypothetical judgment lien arising as of the time of the tax lien filing, out of an unsecured transaction.
  • The security interest must be created by a written agreement entered into before the tax lien filing;
  • The written agreement must constitute either a commercial transaction financing agreement, a real property construction or improvement financing agreement, or an obligatory disbursement agreement; and
  • The security interest is entitled to priority only to the extent it is in "qualified property," a defined term whose scope varies depending on the category of written agreement involved.
  • Obligatory Disbursement Agreement. An "obligatory disbursement agreement" is an agreement entered into by a person in the course of his trade or business to make disbursements, but only to the extent such disbursements are required by reason of the intervention of the rights of a person other than the taxpayer. This definition covers an agreement creating a suretyship-type relationship. For example, agreements granting a security interest to secure the taxpayer's obligation to reimburse or indemnify the issuer of a letter of credit or performance bond or a guarantor qualify as "obligatory disbursement agreements."

Where the security interest arises under an "obligatory disbursement agreement," "qualified property" is limited to property subject to the lien as of the time of the tax lien filing together with property thereafter acquired to the extent its acquisition is directly traceable to the disbursements made under the obligatory disbursement agreement.

  • Real Property Construction or Improvement Financing Agreement. A "real property construction or improvement financing agreement" means an agreement to make cash advances (the furnishing of goods or services is deemed a cash disbursement) to finance the construction or improvement of real property or a contract to be the same; or the raising or harvesting of a farm crop or livestock. Where the agreement is a "real property construction or improvement financing agreement," "qualified property" is limited to the real property improved, the contract financed or where a crop or livestock is being financed, the crop or livestock in existence as of the time of notice of the tax lien.
  • Commercial Transaction Financing Agreement. A "commercial transaction financing agreement" is an agreement entered into by a person in the course of his trade or business to make loans secured by or purchase "commercial financing security" acquired by the taxpayer in the ordinary course of its business, provided that an agreement shall come within the definition only to the extent that the loan or purchase is made before the earlier of (i) the 46th day after the tax lien filing; or (ii) the date the lender/purchaser has actual notice or knowledge of the tax lien filing. "Commercial financing security" means commercial paper, accounts, mortgages or real property and inventory. Where the agreement is a commercial transaction financing agreement, "qualified property" is limited to "commercial financing security" acquired by the taxpayer before the 46th day after the tax lien filing. Thus, with respect to a security interest arising under a commercial transaction financing agreement, the lender/purchaser is afforded priority as both disbursements made (assuming no notice or knowledge of the tax lien filing) and property acquired before the 46th day after the tax lien filing.

Obligations Secured by Tax Lien:

Section 6321 provides that the tax lien secures the amount of "any tax," together with any "interest, additional amount, addition to tax, or assessable penalty, together with any costs that may have accrued in addition thereto." The case law confirms the broad scope of the tax lien: it covers all taxes due the United States (i.e., federal taxes) for which the debtor may be liable. See, U.S. v. Cleavenger, 325 F.Supp.871, 874-75 (N.D. Ind. 1971). This tax lien covers federal income tax as well as all federal withholding taxes.

While the language of Section 6321 is broad enough to encompass all federal taxes for which a person may be liable, including estate taxes, Section 6324 creates specific liens for estate taxes and gift taxes that are of an "in rem" nature, that is, limited to the value of the property received. Estate liens under Section 6324 attach upon the death of the decedent and do not require assessment or demand to be effective, although pursuant to Section 6324(c)(1), such lien will have priority over liens to the same extent of the general tax lien per Section 6323(b).

Property Subject to Federal Tax Lien

The lien arising under Section 6321 attaches to "all property and rights to property, whether real or personal" of the debtor. The language of the statute is intentionally broad and intended to reach every species of right or interest protected by law and having an exchangeable value. Drye v. U.S., 528 U.S. 49, 56 (1999); See also, In Re Raihl, 152 BR 615, 617 (9th Cir.BAP 1993). The federal tax lien attaches to all property of the person liable for the tax, including property otherwise exempt from levy or execution under state or federal law. See, Medaris v. U.S., 884 F.2d 832, 833-34 (5th Cir. 1989) (Texas statute exempting spouse's earnings from debtor spouse's creditors ineffective as to a tax lien); In Re Raihl, 152 B.R. 615 (9th Cir. BAP 1993) (pension funds subject to tax lien even though plans qualified as spend thrift trust and not property of bankruptcy estate).

The Classes of Lienor and Lienee Subject to Lien:

The United States is the only party entitled to assert a federal tax lien. Any individual or legal entity that is liable for a federal tax is subject to having its property encumbered by a federal tax lien arising under Section 6321, and Section 6324 creates a tax lien upon the property of a probate estate. The property of a party other than the "person liable to pay" the tax may be encumbered by a federal tax lien under an alter ego/nominee theory. See, e.g., Cody vs. U.S., 348 F. Supp. 2d. 682 (E.D. VA 2004).

Measures to Protect Against Risks of Federal Tax Lien:

Due Diligence. A secured creditor should consider conducting the following due diligence in connection with the priority risks posed by a potential federal tax lien:

  1. Conduct UCC searches in the filing office of the state of debtor's residence. In the case of a debtor that is not an individual, this includes a search in all states where the debtor's "principal executive office of business" is located.
  2. To comply with the "reasonable and diligent" standard applicable to notices of federal tax lien, conduct UCC searches not only under the debtor's correct name, but commonly occurring variants. This may involve both searches under the filing offices' standard search logic as well as searching by searches that employ broader, more error tolerant, search logic.
  3. Search in filing offices of states of debtor's former residences (at least for 10 years).

Standard provisions that a secured party may include in its security agreement with respect to protecting against losing priority to a federal tax lien include:

  1. Having the debtor covenant to timely pay all federal taxes and to promptly notify secured party of any (i) failure to pay taxes; (ii) assessment of taxes; or (iii) notice of tax lien.
  2. Making a failure to pay taxes (subject to an exception for taxes disputed in good faith), an assessment of taxes or the filing of a notice of tax lien an event of default.
  3. Entitling secured party to pay the amount to discharge a tax lien and add such amounts to the principal and interest to its secured obligations.

In addition to requiring the debtor to covenant with respect to the tax assessments and notices of tax lien, the secured party should consider making periodic searches of the filing office of the state of the debtor's residence for potential notices of tax lien.

2. Unpaid Sales and Use Taxes under Rev. & Tax. Code Section 6757.38

Statutory Framework:

Revenue and Taxation Code § 6757 provides as follows:

  1. If any person fails to pay any amount imposed under this part at the time that it becomes due and payable, the amount thereof, including penalties and interest, together with any costs in addition thereto, shall thereupon be a perfected and enforceable state tax lien. The lien is subject to Chapter 14 (commencing with Section 7150) of Division 7 of Title 1 of the Government Code.
  2. For the purpose of this section, amounts are "due and payable" on the following dates:
    1. For amounts disclosed on a return received by the board before the date the return is delinquent, the date the return would have been delinquent;
    2. For amounts disclosed on a return filed on or after the date the return is delinquent, the date the return is received by the board;
    3. For amounts determined under Section 6536 (pertaining to jeopardy assessments), the date the notice of the board's finding is mailed or issued;
    4. For all other amounts, the date the assessment is final.
  3. The lien provided by this section shall not arise during any period that Section 362 of the United States Bankruptcy Code applies to the person against whom the lien would otherwise apply.

How the Lien Arises/Attaches:

The lien for unpaid sales and use taxes is a state tax lien that arises at the time the tax is due and payable. Revenue and Taxation Code § 6757(a). See also Government Code § 7162 which provides, among other things, that a "[s]tate tax lien" means a lien created pursuant to ... Section 6757, .... Revenue and Taxation Code § 6757(a) provides that the amount of any delinquent sales and use taxes, together with the applicable penalties, interest, and costs are a perfected and enforceable state tax lien under Government Code §§ 7150 et seq. Notwithstanding the foregoing, if the taxpayer is the subject of a bankruptcy proceeding, and the automatic stay under Section 362 of the Bankruptcy Code is in effect, then the lien will not arise. (Revenue and Taxation Code § 6757(c)).

This lien for unpaid sales and use taxes attaches to all property and rights to property whether real or personal, tangible or intangible, including all after-acquired property and rights to property, belonging to the taxpayer and located in the State of California. (Government Code § 7170(a)). A state tax lien attaches to a dwelling notwithstanding the prior recording of a homestead declaration. (Government Code § 7170(a)).

Perfection of the Lien:

The lien for unpaid sales and use taxes is perfected at the time it arises with no further act required. (Revenue and Taxation Code § 6757(a)).

Priority of the Lien:

Revenue and Taxation Code § 6756 provides:

The amounts required to be paid by any person under this part together with interest and penalties shall be satisfied first in any of the following cases:

  1. Whenever the person is insolvent.
  2. Whenever the person makes a voluntary assignment of his assets.
  3. Whenever the estate of the person in the hands of executors, administrators, or heirs is insufficient to pay all the debts due from the deceased.
  4. Whenever the estate and effects of an absconding, concealed, or absent person required to pay any amount under this part are levied upon by process of law.

This section does not give the state a preference over any lien or security interest which was recorded or perfected prior to the time when the state records or files its lien as provided in Section 7171 of the Government Code.

The preference given to the state by this section shall be subordinate to the preferences given to claims for personal services by Sections 1204 and 1206 of the Code of Civil Procedure.

The lien for unpaid sales and use taxes has priority over ordinary debts in cases of insolvency, voluntary assignment of assets, administration of an insolvent decedent's estate, and where the estate and effects of an absconding, concealed, or absent person are levied on by process of law. (Revenue and Taxation Code § 6756). But, the following liens and security interests are prior to the lien for unpaid sales and use taxes:

  1. A lien recorded or a security interest perfected prior to the time the state recorded or filed its lien. Revenue and Taxation Code § 6756; see also Government Code §§ 7170 and 7171.
  2. Claims for personal services under Code of Civil Procedure §§ 1204 and 1206. Revenue and Taxation Code § 6756.

Thus, while not necessary for perfection of the state tax lien, in order to establish priority the state must record its notice of state tax lien. With respect to real property, the state may record in the office of the county recorder of the county in which the real property is located. (Government Code § 7170(b)). With respect to personal property, the state may file a notice of state tax lien with the Secretary of State. (Government Code § 7170(c); see also Government Code §§ 7220-7229). In addition, Government Code § 7171(c) requires that the notice of state tax lien contain the following information:

  1. the name and last known address of the taxpayer.
  2. the name of the agency giving notice of the lien.
  3. the amount of the unpaid tax.
  4. a statement that the amount of the unpaid tax is a lien on all real or personal property and rights to that property, including all after-acquired property and rights to property, belonging to the taxpayer.
  5. a statement that the agency has complied with all of the provisions of the applicable law for determining and assessing the tax.

(See also Government Code §§ 7220-7229).

The Obligations Secured by the Lien:

The lien created under Revenue and Taxation Code § 6757 secures the amount of any delinquent sales and use taxes, together with the applicable penalties, interest, and costs. (Revenue and Taxation Code § 6757(a)).

The Collateral Subject to the Lien:

This lien for unpaid sales and use taxes attaches to all property and rights to property whether real or personal, tangible or intangible, including all after-acquired property and rights to property, belonging to the taxpayer and located in the State of California. (Government Code § 7170(a)). A state tax lien attaches to a dwelling notwithstanding the prior recording of a homestead declaration. (Government Code § 7170(a)).

The Classes of Secured Party/Debtor Subject to the Lien:

Any person who fails to pay any amount of sales tax, including penalties, interests and costs is a debtor subject to the hidden lien created by Revenue and Taxation Code § 6757. Secured parties who take as collateral any property, real or personal, of the debtor may find that their collateral is subject to a prior hidden lien under Revenue and Taxation Code § 6757. However, while it is not necessary for perfection of this hidden state tax lien, in order to establish priority, the state must record its notice of state tax lien with respect to real property in the office of the county recorder of the county in which the real property is located (Government Code § 7170(b)) and with respect to personal property with the office of the Secretary of State (Government Code § 7170(c) and Government Code §§ 7220-7229).

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Secured lenders can protect themselves against the hidden lien created under Revenue and Taxation Code § 6757 by: (a) performing a tax lien search simultaneously with the Commercial Code search of the debtor in the Office of the Secretary of State of California; and (b) performing a lien search of the county records of the county where the debtor owns real property prior to funding its loan to confirm that there are no state tax liens on the assets of the debtor with priority over the secured parties lien.

3. Unpaid unemployment compensation taxes under Unemp. Ins. Code Section 1703.

[TO BE ADDED IN SUBSEQUENT DRAFT]

4. Tax liens generally. See Government Code Section 7171 (state tax lien); Rev. & Tax Code Sections 2191.3-.6 (county tax liens); Pub. Res. Code Section 4178 (fire hazard abatement); Rev. & Tax. Code Section 11491-11496 (taxes on private railroad cars).

[TO BE ADDED IN SUBSEQUENT DRAFT]

5. Environmental contamination giving rise to liens under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601(1) et seq. (CERCLA).39

Statutory Framework:

Section 107(l)(1) of CERCLA provides as follows:

All costs and damages for which a person is liable to the United States under subsection (a) of this section (other than the owner or operator of a vessel under paragraph (1) of subsection (a)) shall constitute a lien in favor of the United States upon all real property and rights to real property which:

  1. belong to such person and
  2. are subject to or affected by a removal or remedial action

Section 107(m) of CERCLA provides as follows:

All costs and damages for which the owner or operator of a vessel is liable under subsection (a)(1) with respect to a release or threatened release from such vessel shall constitute a maritime lien in favor of the United States on such vessel. Such costs may be recovered in an action in rem in the district court of the United States for the district in which the vessel may be found. Nothing in this subsection shall affect the right of the United States to bring an action against the owner or operator of such vessel in a court of competent jurisdiction to recover such costs.

Section 107(r)(1) of CERCLA provides an exception to liability under subsection (a)(1) to a bona fide prospective purchaser who does not impede a restoration or response action being taken with respect to the property being purchased. However, Section 107(r)(2) of CERCLA provides as follows:

  1. If there are unrecovered response costs incurred by the United States at a facility for which an owner of the facility is not liable by reason of paragraph (1), and if each of the conditions described in paragraph (3) is met, the United States shall have a lien on the facility, or may by agreement with the owner, obtain from the owner a lien on any other property or other assurance of payment satisfactory to the Administrator, for unrecovered response costs.
  2. The conditions set forth in paragraph (3) are that (i) the United States must have unrecovered costs for response actions carried out at the facility and (ii) the fair market value of the facility increases as a result of the response action.

How the Lien Arises/Attaches:

CERCLA contains three subsections creating liens in favor of the United States for environmental liabilities. Subsection (a) of Section 107 of CERCLA sets forth the persons, subject to certain exceptions, who may be subject to liability and subsection (b) of that section sets forth defenses to liability.

The lien under Section 107(l) of CERCLA arises at the time the United States first incurs costs with respect to a response under CERCLA or when a person receives written notice of potential liability under CERCLA, whichever is later. This lien remains in effect until the earlier of when all the costs and liabilities the lien secures are paid or the lien becomes unenforceable by operation of the statute of limitations. Section 113 of CERCLA [42 U.S.C. § 9613] contains the statute of limitations.

The lien under Section 107(m) of CERCLA is a maritime lien and would attach in accordance with maritime law.

The lien under Section 107(r) of CERCLA arises at the time the U.S. first incurs costs with respect to a response action at the facility. The lien under Section 107(r) of CERCLA remains in effect until the earlier of when the obligations securing the lien have been paid or, without giving effect to the statute of limitations, the United States recovers all response costs incurred with respect to the facility.

Perfection of the Lien:

The statutory lien arising under Section 107(l) of CERCLA must be filed with the appropriate office for the filing of such liens within the State, county or other governmental subdivision where the real property is located or, if State law does not designate one office to receive such notices, then with the clerk of the United States district court in the district where the real property is located.

The statutory lien arising under Section 107(m) of CERCLA would be perfected in accordance with maritime law. A person claiming a maritime lien may file a notice of lien with the Secretary of Transportation pursuant to 46 U.S.C. § 31343.

The statutory lien arising under Section 107(r) of CERCLA extends to a "facility." Section 101(9) of CERCLA [42 U.S.C. § 9601] defines a "facility" as "(A) any building, structure installation, equipment, pipe or pipeline (including any pipe into a sewer or publicly owned treatment works), well, pit, pond, lagoon, impoundment, ditch, landfill, storage container, motor vehicle, rolling stock or aircraft, or (B) any site or area where a hazardous substance has been deposited, stored, disposed of, or placed or otherwise located; but does not include any consumer product in consumer use or any vessel." Due to the breadth of this definition, the manner of perfecting the lien will depend on what assets comprise the facility.

Priority of the Lien:

Section 107(l)(3) of CERCLA provides that:

The lien imposed by this subsection shall be subject to the rights of any purchaser, holder of a security interest, or judgment lien creditor whose interest is perfected under applicable State law before written notice of the lien has been filed with the appropriate office within the State (or county or other governmental subdivision), as designated by State law, in which the real property subject to the lien is located. Any such purchaser, holder of a security interest, or judgment lien creditor shall be afforded the same protections against the lien imposed by this subsection as are afforded under State law against a judgment lien which arises out of an unsecured obligation and which arises as of the time of the filing of the notice of the lien imposed by this subsection.

Section 107(m) and Section 107(r) of CERCLA are silent on priority of the liens arising under those subsections.

The Obligations Secured by the Lien:

The lien created under Section 107(l) secures all costs and damages for which a person (other than an owner or operator of a vessel) is liable to the United States under subsection (a) of that section. The costs and damages for which a person may be liable under Section 107(a)(1) are:

  1. all costs of removal or remedial action incurred by the United States Government or a State or Indian tribe not inconsistent with the national contingency plan;
  2. any other necessary costs of response incurred by any other person consistent with the national contingency plan;
  3. damages for injury to, destruction of, or loss of natural resources, including the reasonable costs of assessing such injury, destruction, or loss resulting from such a release; and
  4. the costs of any health assessment or health safety effects study carried out under Section 104(i) [42 U.S.C. § 9604(i)].

A person is also liable to the United States for interest, accruing at the rate specified in subsection (a), on the costs and damages described above. In addition, a person may be liable for punitive damages in certain circumstances under subsection (c)(3).

The lien created under Section 107(m) of CERCLA secures the obligations described in subsection (a) of that section for which an owner or operator of a vessel is liable as a result of releases or threatened releases from the vessel.

The lien created under Section 107(r) of CERCLA secures the unrecovered response costs incurred by the U.S. at the facility up to the amount by which the fair market value of the property increased at the time of the sale or other disposition of the property due to the response action.

The Collateral Subject to the Lien:

The lien created under Section 107(l) of CERCLA is applicable to the real property and rights thereto that is subject to or affected by a removal or remedial action for which the person who owns the property is subject to liability under subsection (a).

The lien created under Section 107(m) of CERCLA is applicable to the vessel from which there is a release or threatened release giving rise to liability under subsection (a).

The lien created under Section 107(r) of CERCLA is applicable to a facility for which the owner is not liable for unrecovered response costs by reason of Section 107(r)(1) or to such other property as may be agreed to by the U.S. and the owner of the facility.

The Classes of Secured Party/Debtor Subject to the Lien:

  1. Secured parties who take as collateral real property or vessels are subject to the hidden lien arising under Section 107 of CERCLA.
  2. Debtors who own or purchase real property or own or operate vessels are subject to the lien arising under Section 107 of CERCLA.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

Lenders can obtain priority over the liens created under Section 107 of CERCLA and protect themselves against this hidden lien by (a) performing a title search on any real property, and a search of the district court where the real property is located, that will serve as collateral, (b) requiring Phase I environmental reports for real property that will serve as collateral, (c) performing a search with the Secretary of Transportation to determine if any notices have been filed with respect to vessels that will constitute collateral, (d) performing a search of the applicable Secretary of State's Commercial Code filing records prior to funding their loan to confirm that there are no other liens, (e) performing appropriate searches for other collateral owned by the Debtor and constituting a facility as defined in CERCLA, (f) timely filing mortgages, financing statements, etc., (g) requiring borrowers to make representations and warranties in the loan documents as to environmental matters, including the past and present compliance with environmental laws and environmental liabilities, (h) providing for affirmative covenants in the loan documents with respect to compliance with environmental laws and (i) providing a negative covenant in the loan documents restricting liens arising from environmental liabilities.

6. ERISA liens under 29 U.S.C. Section 1368.40

Statutory Framework:

This lien arises under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001-1461.

How the Lien Arises/Attaches:

ERISA provides the following in 29 U.S.C. § 1368(a):

If any person liable to the corporation [viz., the Pension Benefit Guaranty Corporation -- see 29 U.S.C. § 1301] under Section 1362, 1363, or 1364 of this title [see below] neglects or refuses to pay, after demand, the amount of such liability (including interest), [THEN:] there shall be a lien in favor of the corporation in the amount of such liability (including interest) upon all property and rights to property, whether real or personal, belonging to such person, except that such lien may not be in an amount in excess of 30 percent of the collective net worth of all persons described in Section 1362 (a) of this title.

Perfection of the Lien:

Under 29 U.S.C § 1368(c), this ERISA lien is perfected when the Pension Benefit Guaranty Corporation files a notice of the lien in the place that a federal tax lien would be filed as provided in the Internal Revenue Code, 26 U.S.C. § 6323(f).

The Obligations Secured by the Lien:

Generally speaking, this ERISA lien secures the obligation of an employer and its "controlled group" (discussed below) to fund the benefits of a single-employer, defined-benefit pension plan, IF (i) the plan is terminated in (x) a "distress" termination or (y) by the Pension Benefit Guaranty Corporation, or (ii) in certain circumstances, if a "substantial employer" withdraws from the plan. See 29 U.S.C. §§ 1368(a) and 1362-1364.

The Collateral Subject to the Lien:

Under 29 U.S.C. § 1368(a), this ERISA lien applies to "all property and rights to property, whether real or personal, belonging to such person [see below], except that such lien may not be in an amount in excess of 30 percent of the collective net worth of all persons described [below]."

The Classes of Secured Party/Debtor Subject to the Lien:

Under 29 U.S.C. § 1362(a), this ERISA lien applies to property of "any person who is, on the termination date [of the single-employer defined-benefit pension plan], a contributing sponsor of the plan or a member of such a contributing sponsor's controlled group [which consists, in essence, of all "persons" under common control with the contributing sponsor]," if that person refuses a demand for payment by the Pension Benefit Guaranty Corporation.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

  1. Obtain a rep that (i) the person is not a member of a "controlled group" for a single-member defined-benefit pension plan, and/or (ii) the pension plan has not been subject to a "distress" termination, etc., and/or (iii) the pension plan has fully funded its pension liabilities; and/or (iv) the person has not received a demand for payment by the Pension Benefit Guaranty Corporation.
  2. When checking for federal tax liens, also check for ERISA liens.

7. Lien for public employees' retirement systems under Government Code Section 20574.41

Statutory Framework:

Government Code § 20574 provides in full:

A terminated agency shall be liable to the system for any deficit in funding for earned benefits, as determined pursuant to Section 20577, interest at the actuarial rate from the date of termination to the date the agency pays the system, and for reasonable and necessary costs of collection, including attorney's fees. The board shall have a lien on the assets of a terminated contracting agency, subject only to a prior lien for wages, in an amount equal to the actuarially determined deficit in funding for earned benefits of the employee members of the agency, interest, and collection costs. The assets shall also be available to pay actual costs, including attorneys' fees, necessarily expended for collection of the lien.

How the Lien Arises/Attaches:

The lien arises if a contracting agency remains liable to the retirement system for a deficit in funding for earned benefits after such contracting agency's contract with the Board of Administration of the Public Employees' Retirement System (the "Board") for retirement benefits has been terminated. Such contract may be terminated by either the contracting agency or the Board in the following circumstances: A contracting agency generally has the right to terminate such contract if the contract has been in effect for at least five years and the governing body of such contracting agency adopts a resolution or ordinance, with the affirmative vote of two-thirds of the members of such governing body, terminating such contract. The Board has the right to terminate such contract by a majority vote of its members if the contracting agency fails for thirty days after demand by the Board to pay any installment of contributions required by its contract or fails to file any required information, or if the Board determines that the agency is no longer in existence.

Perfection of the Lien:

The statute is silent on how to perfect the lien or whether perfection is necessary.

Priority of the Lien:

The statute provides that the lien is subject only to a prior lien for wages owed by the terminated contracting agency.

The Obligations Secured by the Lien:

The lien secures the deficit in funding for earned benefits owed by the contracting agency as determined pursuant to Government Code § 20577, accruing interest and collection costs.

The Collateral Subject to the Lien:

The statute provides that the Board shall have a lien on the assets of the contracting agency. Though not entirely clear, the lien presumably is a blanket lien over all assets of the contracting agency.

The Classes of Secured Party/Debtor Subject to the Lien:

The secured party is the Board. The debtor is the contracting agency which is defined as any public agency that has elected to have all or any part of its employees become members of the retirement system and that has contracted with the Board for that purpose. Contracting agency is also defined as any county office of education, school district, or community college district that has elected to have all or part of its employees participate in a risk pool and that has contracted with the Board for that purpose.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

The risk of being primed by this lien only arises if the debtor is a public agency. In such a circumstance, the secured party should ensure that the debtor has not recently terminated a contract for retirement benefits with the Board where the debtor has continuing liabilities. It may be prudent to retain the advice of an attorney who specializes in the area of public employee benefits to confirm one's understanding.

8. Liens for unpaid wages pursuant to the "hot goods" section of the federal Fair Labor Standards Act, 29 U.S.C. Section 215(a)(1).42

Statutory Framework:

Section 215(a)(1) of the Fair Labor Standards Act provides that:

... [I]t shall be unlawful for any person to transport, offer for transportation, ship, deliver, or sell in commerce, or to ship, deliver, or sell with knowledge that shipment or delivery or sale thereof in commerce is intended, any goods in the production of which any employee was employed in violation of Section 206 or Section 207 of this title, or in violation of any regulation or order of the Secretary issued under Section 214 of this title; except that no provision of this chapter shall impose any liability upon any common carrier for the transportation in commerce in the regular course of its business of any goods not produced by such common carrier, and no provision of this chapter shall excuse any common carrier from its obligation to accept any goods for transportation; and except that any such transportation offer, shipment, delivery, or sale of such goods by a purchaser who acquired them in good faith in reliance on written assurance from the producer that the goods were produced in compliance with the requirements of this chapter, and who acquired such goods for value without notice of any such violation, shall not be deemed unlawful.

How the Lien Arises/Attaches:

In Citicorp Industrial Credit, Inc. v. Brock, Secretary of Labor, 483 U.S. 27 (1987), the Supreme Court held that no lien is actually created under 29 U.S.C. § 215(a)(1) of the Fair Labor Standards Act (29 U.S.C. §§ 201-219) (the "FLSA" or the "Act"), which is commonly known as the "Hot Goods" provision of the FLSA. Rather, the possessor of goods manufactured in violation of the minimum wage or overtime requirements of the FLSA may be enjoined from selling, transferring, shipping or otherwise injecting those items into interstate commerce until the employees involved in the production of those goods are paid.

In Citicorp, the Supreme Court considered whether the Hot Goods provision "applies to holders of collateral obtained pursuant to a security agreement." Citicorp, 483 U.S. at 29. Citicorp entered into a financing agreement with the predecessor-in-interest of Ely Group, Inc. (collectively, "Ely") in which Citicorp agreed to lend to Ely the sum of $11 million. To secure the loan, Ely granted to Citibank a lien in its inventory, accounts receivable, and other assets, and the lien was perfected under applicable state law. Id. Ultimately, Ely became insolvent and had to close its manufacturing facilities. Citicorp foreclosed on its liens, and took possession of its collateral, including inventory manufactured by Ely's employees whose wages had not been paid in violation of the FLSA. Id. When Citicorp attempted to sell its collateral, an injunction was obtained by the Secretary of Labor. Id. at 30.

The Court noted that there are only two exceptions to the Hot Goods provision of the FLSA: (1) common carriers, and (2) ultimate purchasers without notice. Id. at 33-34. Otherwise, "all other persons, innocent or not, are subject to § 15(a)(1)." Id. at 34 (emphasis in original). Consequently, the Court affirmed the injunction issued by the lower courts prohibiting Citicorp from disposing of the collateral, noting that Citicorp "can cure the employer's violation of the FLSA by paying the employees the statutorily required wages . . ". but that this "... does not give the employees a 'lien' on the assets superior to that of a secured creditor." Citicorp, 483 U.S. at 38-39.

Perfection of the Lien:

As no lien is actually created under the Hot Goods provision, there are no requirements for perfection. However, as the Court stated in Citicorp, "secured creditors take their security interests subject to the laws of the land." Id. at 39. So, an injunction may be issued by a court of competent jurisdiction against the possessor of such collateral upon proof that the collateral was manufactured in violation of the FLSA, and that there is no applicable exception. The injunction will remain in effect so long as the workers' wages remain unpaid.

Priority of Lien:

Again, the Court in Citicorp noted that a "literal application of § 15(a)(1) does not grant employees a priority in 'hot goods' superior to that which a secured creditor has under state law." Citicorp, 483 U.S. at 38. Rather, the secured creditor "still owns the goods, subject only to the 'hot goods' provision, which prevents it from placing them in interstate commerce." Id.

Obligations Secured by the Lien:

Any injunction granted for a violation of the Hot Goods provision would terminate once the wages due in connection with the Hot Goods are paid to the employees.

Collateral Subject to Lien:

Any goods produced by a manufacturer who fails to comply with the minimum wage or overtime wage provisions of the FLSA. See 29 U.S.C. § 215(a)(1).

Classes of Secured Party/Debtor Subject to the Lien:

  • The "secured party" would be the employees who have not yet received their wages in accordance with Sections 6 and 7 of the Act.

The "debtor" would be the secured party or other possessor of the "hot goods," who must pay the unpaid wages before it can dispose of or otherwise use the collateral in interstate commerce.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

As stated above, the Hot Goods provision includes two (2) exceptions: the first is for common carriers; and the second is for purchasers who acquire Hot Goods in good faith reliance on written assurance from the producer that the goods were produced in compliance with the requirements of the Act, and "who acquired such goods for value without notice of any such violation ..." 29 USC § 215(a)(1). In Citicorp, the petitioner (a secured creditor) did not argue that it was covered under either exception. Id. at 34. Rather, Citicorp argued that there should be an exception for innocent secured creditors, which the court rejected, in part, because there was "no duty to ascertain compliance with the FLSA." Id. at 35. Consequently, when taking a security interest in goods, the secured party should, at a minimum, require written representations and warranties from the debtor that the goods are being manufactured in compliance with the FLSA.

The Court in Citicorp also focused on the reporting requirements involved in Citicorp's loan to Ely, and noted that "[s]ecured creditors often monitor closely the operations of employer-borrowers ... and may be in a position to insist on compliance with the FLSA's minimum wage and overtime requirements." Citicorp, 483 U.S. at 37. It follows that a secured creditor should include in its security agreements a covenant to comply with the FLSA.

Finally, since a secured party takes its collateral subject to the Hot Goods provision, which prevents it from placing them in interstate commerce until the workers' wages are paid, a secured creditor should require indemnification from the debtor and all guarantors for any costs or expenses incurred in connection with lifting any injunction imposed pursuant to the Hot Goods provision of the FLSA, including, without limitation, the payment of any wages to employees involved in manufacturing goods constituting collateral for the secured party's loan to the debtor.

Miscellaneous:

While the Court in Citicorp did not address the application of the Hot Goods provision in a bankruptcy context, the Sixth Circuit Court of Appeals addressed this issue in Chao v. Hosp. Staffing Serv., Inc., 270 F.3d 374 (6th Cir. 2001). In Chao, the court rejected the holding of the Eleventh Circuit Court of Appeals in Brock v. Rusco Indus., 842 F.2d 270 (11th Cir. 1988), which held that "a 'hot goods' action falls within the [11 USC] § 362 (b)(4) police power exception to the automatic stay." Chao, 270 F.3d at 387 (citing Brock, 842 F.2d at 273). To determine whether this exception to the automatic stay applies in a particular Hot Goods action, the Chao Court applied two separate tests: a "pecuniary interest test," and a "public policy" test. See Chao, 270 F.3d at 388-89, and 394. The pecuniary interest test focuses on "whether the enforcement action would result in a pecuniary advantage to the government vis-à-vis other creditors of the bankruptcy estate." Id. at 389 (fn. 9) (emphasis in original). The Chao court concluded that since the Secretary's suit seeks only an injunction to prevent the bankruptcy trustee from introducing the goods in question into interstate commerce, there is no pecuniary gain to the government. Consequently, the Chao court found that the pecuniary interest test had been satisfied. Id. at 389.

The public policy test asks "whether a governmental unit brought suit 'to enforce such governmental unit's ... police and regulatory power" to vindicate private rights or serve a public good. See Chao, 270 F.3d at 394. Because of the nature of the Hot Goods involved (records the bankruptcy trustee intended to use to create accounts receivable), the Chao court concluded that "the Secretary's enforcement action does not protect other workers in the economy because the records at issue here will not --- unlike garments or windows and doors --- enter commerce and compete with fairly produced goods ... the injunction action is merely a vehicle to enforce the private rights of the employees to minimum portion of their wages Congress guaranteed." Id. at 393-394. The Chao court held that "the § 362 (b)(4) exception to the automatic stay does not apply to the instant action" and the Bankruptcy Court "had exclusive jurisdiction over the debtor and the property of its bankruptcy estate." Id. at 394.

9. Claims arising under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Sections 1961 et seq. (RICO) (relating back to date of violation).

[TO BE ADDED IN SUBSEQUENT DRAFT]

10. Liens for Utility and Related Services.

a. Lien for special assessment with respect to the weed and rubbish abatement under Government Code Section 39577.43

Statutory Framework:

This lien arises under Government Code § 39577.

How the Lien Arises/Attaches:

Government Code Section 39561 permits the legislative body of a city, by resolution, to abate, as a nuisance, "weeds" (as defined in Section 39561.5), rubbish, refuse, and dirt, on private property:

The legislative body may declare by resolution as public nuisances, and abate: (a) All weeds growing upon the streets, sidewalks, or private property in the city. (b) All rubbish, refuse, and dirt upon parkways, sidewalks, or private property in the city.

The city must then provide notice to the property owner, and the legislative body must conduct a hearing at which the property owner can object to the proposed abatement. IF: No objection is made, or objections are overruled; THEN: The legislative body may order the city's street superintendent, by motion or resolution, to abate the nuisance, keeping track of the cost of abatement for each separate parcel of land. See Government Code §§ 39564-39574.

Once the legislative body has confirmed the superintendent's report of the cost of abatement (see Government Code § 39576), a copy of the report is provided to the tax assessor and the cost of abatement is added to the next tax bill for the property from which weeds, rubbish, etc., were removed (see Section 39578).

In addition, a lien for the cost of abatement attaches to the property, as stated in Government Code § 39577:

The cost of abatement in front of or upon each parcel of land and the costs incurred by the responsible agency in enforcing abatement upon the parcels, including investigation, boundary determination, measurement, clerical and other related costs, constitutes a special assessment against that parcel.

After the assessment is made and confirmed, a lien attaches on the parcel upon recordation of the order confirming the assessment in the office of the county recorder of the county in which the property is situated, except that [i] if any real property to which such lien would attach has been transferred or conveyed to a bona fide purchaser for value, or [ii] if a lien of a bona fide encumbrancer for value has been created and attaches thereon, prior to the date on which the first installment of such taxes as imposed by Section 39578 would become delinquent, then [iii] the lien which would otherwise be imposed by this section shall not attach to such real property and the costs of abatement and the costs of enforcing abatement, as confirmed, relating to such property shall be transferred to the unsecured roll for collection. [Extra paragraphing, underlining, and bracketed numbering added.]

Perfection of the Lien:

The lien is perfected at the time it attaches, that is, at the time it is recorded in the office of the county recorded -- see Government Code § 39577.

Priority of the Lien:

Under Government Code § 39577, the lien is junior in priority to (i) the interest in the property of a bona fide purchaser for value, and (ii) to a lien of a bona fide encumbrancer for value that was created and attached before the date on which the first installment of the added tax bill (see Section 39578) would become delinquent.

The Obligations Secured by the Lien:

See the discussion above.

The Collateral Subject to the Lien:

The lien applies to the parcel of land from which weeds, rubbish, etc., are removed -- see Government Code § 39577.

The Classes of Secured Party/Debtor Subject to the Lien:

See the discussion above.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A party conducting due diligence can check the records in the county recorder's office for a notice of this lien.

b. Liens for fees for waste disposal services under Government Code Section 2583 1(d).

[TO BE ADDED IN SUBSEQUENT DRAFT]

c. Liens for removal of dirt, rubbish, weeds, etc. under Government Code Section 39501.

[TO BE ADDED IN SUBSEQUENT DRAFT]

d. Lien for removal of obstructions or noxious materials under Government Code Section 39502.

[TO BE ADDED IN SUBSEQUENT DRAFT]

e. Lien for abatement of nuisances under Government Code Section 38773.

[TO BE ADDED IN SUBSEQUENT DRAFT]

f. Lien for furnishing utility services under Pub. Res. Code Section 5003.7.44

How the Lien Arises/Attaches:

The lien under Cal. Pub. Res. Code § 5003.7 for state utility services applies where the Department of Parks and Recreation or the Department of General Services is not paid for water, sewage, gas, electricity, garbage, or other utility services provided to real property owners. In order to effect the lien, a notice of lien must be recorded in the county where the real property is located.

Perfection of the Lien:

The lien encumbers real property and follows the general rule for real property liens in that it is perfected by recording a notice of lien in the county where the real property is located. California Public Resources Code § 5003.7(a).

Priority of the Lien:

The lien follows the general rule for real property liens in that it takes priority from the date of recordation of the notice of lien. California Public Resources Code § 5003.7(e).

Civil Code § 2897 generally provides that, all other things being equal, different liens on the same property have priority according to the time of their creation. The statute creating this lien, California Public Resources Code § 5003.7, does not provide for any different priorities and in fact expressly states that priority dates from the date of recordation of the lien.

The Obligations Secured by the Lien:

The lien created under California Public Resources Code § 5003.7 secures water, sewage, gas, electricity, garbage, or other utility services provided to real property owners by the Department of Parks and Recreation or the Department of General Services to real property. The lien extends to delinquent charges for 4 years prior to the filing of the notice of lien.

The Collateral Subject to the Lien:

The lien created under California Public Resources Code § 5003.7 applies to the real property to which the water, sewage, gas, electricity, garbage, or other utility services is provided.

The Classes of Secured Party/Debtor Subject to the Lien:

Debtors and secured parties with an interest in the real estate are subject to the lien arising under California Public Resources Code § 5003.7. The lien takes priority from the time of filing so it does not affect the priority of prior recorded liens.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured party can protect itself against this lien by taking the usual actions it takes to protect itself against any other real estate lien that takes priority from the date of recordation: (a) performing a title search and obtaining title insurance for its deed of trust and (b) requiring its borrower to represent and warrant that there are no unpaid obligations owing with respect to the property that might result in a lien.

Miscellaneous:

The lien created under California Public Resources Code § 5003.7 does not appear to be cited in any published cases or referred to in any other California statutes.

g. Lien for Charges for Light, Water and Other Utilities under Pub. Util. Code Section 16470.

[TO BE ADDED IN SUBSEQUENT DRAFT]

h. Lien for Corrective Actions with Respect to Timber Harvesting under Pub. Res. Code Section 4608.

[TO BE ADDED IN SUBSEQUENT DRAFT]

i. Lien for Abatement of Nuisance by Pest Abatement Districts under Health & Safety Code Section 2864.

[TO BE ADDED IN SUBSEQUENT DRAFT]

j. Lien for Unpaid Hazardous Waste Abatement under Health & Safety Code Section 14912.

[TO BE ADDED IN SUBSEQUENT DRAFT]

k. Unpaid Charges for Services Rendered upon Leased Sanitation Facilities under Health & Safety Code Section 5061.

[TO BE ADDED IN SUBSEQUENT DRAFT]

l. Lien for Connection of Dwelling to Sewer under Health & Safety Code Sections 5463 and 5464.

[TO BE ADDED IN SUBSEQUENT DRAFT]

m. Liens for Fees for Waste Disposal Services under Government Code Sections 1191-1192.

[TO BE ADDED IN SUBSEQUENT DRAFT]

n. Lien for Mosquito Abatement under Health & Safety Code Section 2284.

[TO BE ADDED IN SUBSEQUENT DRAFT]

o. Lien for Abatement of Controlled Substances under Health & Safety Code Section 42406.

[TO BE ADDED IN SUBSEQUENT DRAFT]

p. Lien for Radiation Contamination under Health & Safety Code Section 115205.

[TO BE ADDED IN SUBSEQUENT DRAFT]

q. Lien for Rodent Abatement under Health & Safety Code Section 116155.

[TO BE ADDED IN SUBSEQUENT DRAFT]

r. Lien for Forest Fire Hazards under Pub. Res. Code Section 4477.

[TO BE ADDED IN SUBSEQUENT DRAFT]

s. Charges Assessed by Water Districts under Water Code Section 46280.

[TO BE ADDED IN SUBSEQUENT DRAFT]

t. Delinquent Water Service Standby and Availability Charges under Water Code Section 155501.1.

[TO BE ADDED IN SUBSEQUENT DRAFT]

u. Lien for Fine for Contempt when Building used for Prostitution in Violation of Abatement Order under Penal Code Section 11233.

[TO BE ADDED IN SUBSEQUENT DRAFT]

v. Liens for Taxes Levied by Municipal Utility District under Pub. Util. Code Section 12904.

[TO BE ADDED IN SUBSEQUENT DRAFT]

11. Health Facility Related Liens.

a. Lien for Local Hospital District Taxes under Health & Safety Code Section 32204.

[TO BE ADDED IN SUBSEQUENT DRAFT]

b. Lien for Health Facility Receiver Expenses under Health & Safety Code.

[TO BE ADDED IN SUBSEQUENT DRAFT]

12. Other Liens.

a. Lien for penalties for polluting vessels under Health & Safety Code Section 42406.

[TO BE ADDED IN SUBSEQUENT DRAFT]

b. Lien for plaintiffs' costs in abatement action to enjoin operation of gambling ship under Penal Code Section 11310.

[TO BE ADDED IN SUBSEQUENT DRAFT]

c. Lien for navigation penalties under Harb. & Nav. Code Section 266.

[TO BE ADDED IN SUBSEQUENT DRAFT]

d. Salvage lien under Harb. & Nav. Code Section 534.

[TO BE ADDED IN SUBSEQUENT DRAFT]

e. Lien for penalties for polluting vessel under Health & Safety Code Section 42406.

[TO BE ADDED IN SUBSEQUENT DRAFT]

f. Lien for oil and gas conservation under Pub. Res. Code Sections 3226 and 3680.

[TO BE ADDED IN SUBSEQUENT DRAFT]

g. Vehicle license fee under Rev. & Tax. Code Section 10876.

[TO BE ADDED IN SUBSEQUENT DRAFT]

h. Liens for taxes levied by the Bay Area Air Quality, Management District under Health & Safety Code Section 40273.

[TO BE ADDED IN SUBSEQUENT DRAFT]

i. Lien for taxes and charges on gas production under Pub. Res. Code Section 3423.

[TO BE ADDED IN SUBSEQUENT DRAFT]

j. Taxes levied by airport districts under Pub. Util. Code Section 22908.

[TO BE ADDED IN SUBSEQUENT DRAFT]

k. Taxes levied by San Francisco Bay Area Transit District under Pub. Util. Code Section 29131.

[TO BE ADDED IN SUBSEQUENT DRAFT]

l. Taxes levied by the Santa Cruz Metropolitan Transit District under Pub. Util. Code Section 98289.3.

[TO BE ADDED IN SUBSEQUENT DRAFT]

m. Unpaid tax for vehicle fuel license taxes under Rev. & Tax. Code Section 6757.

[TO BE ADDED IN SUBSEQUENT DRAFT]

n. Use fuel excise tax under Rev. & Tax. Code Sections 8991-8997.

[TO BE ADDED IN SUBSEQUENT DRAFT]

o. Taxes on insurers under Rev. & Tax. Code Sections 12491-12495.

[TO BE ADDED IN SUBSEQUENT DRAFT]

p. Unpaid cigarette taxes under Rev. & Tax. Code Section 30322.

[TO BE ADDED IN SUBSEQUENT DRAFT]

q. Unpaid alcoholic beverage tax under Rev. & Tax. Code Section 32363.

[TO BE ADDED IN SUBSEQUENT DRAFT]

r. Unpaid timber yield taxes under Rev. & Tax. Code Section 38523.

[TO BE ADDED IN SUBSEQUENT DRAFT]

s. Special assessments for street and highway improvements under Sts. & High. Code Section 3115.

[TO BE ADDED IN SUBSEQUENT DRAFT]

t. Street improvements under 1911 Street Improvement Act under Sts. & High. Code Section 5373.

[TO BE ADDED IN SUBSEQUENT DRAFT]

u. Special assessments for sidewalks and curb improvements under Sts. & High. Code Section 5890.

[TO BE ADDED IN SUBSEQUENT DRAFT]

v. Special assessments for city street lighting under Sts. & High. Code Section 18403.

[TO BE ADDED IN SUBSEQUENT DRAFT]

w. Taxes levied by highway lighting districts under Sts. & High. Code Section 19184.

[TO BE ADDED IN SUBSEQUENT DRAFT]

x. Special assessment for tree planting under Sts. & High. Code Section 27205.

[TO BE ADDED IN SUBSEQUENT DRAFT]

y. Taxes for benefit of bridge and highway districts under Sts. & High. Code Section 27169.

[TO BE ADDED IN SUBSEQUENT DRAFT]

z. Lien for vehicle fees, taxes and penalties under Veh. Code Section 9800.

[TO BE ADDED IN SUBSEQUENT DRAFT]

aa. Storage of vehicle which has been towed under Veh. Code Section 22851.

[TO BE ADDED IN SUBSEQUENT DRAFT]

bb. Unpaid toll fees under Veh. Code Section 23303.

[TO BE ADDED IN SUBSEQUENT DRAFT]

cc. Lien for payments due under Medi-Cal Program under Welf. & Inst. Code Sections 14124.74-.75.

[TO BE ADDED IN SUBSEQUENT DRAFT]

dd. Lien for the overpayment by state to healthcare providers under Welf. & Inst. Code Section 14173.

[TO BE ADDED IN SUBSEQUENT DRAFT]

ee. Unpaid gift taxes under Rev. & Tax. Code Section 16063.

[TO BE ADDED IN SUBSEQUENT DRAFT]

ff. Unpaid personal income taxes under Rev. & Tax. Code Section 18881.

[TO BE ADDED IN SUBSEQUENT DRAFT]

gg. Hazardous substances taxes under Rev. & Tax. Code Section 43413.

[TO BE ADDED IN SUBSEQUENT DRAFT]

hh. Highway use taxes under Veh. Code Section 8162.

[TO BE ADDED IN SUBSEQUENT DRAFT]

ii. Unpaid water charges under Water Code Section 36729.

[TO BE ADDED IN SUBSEQUENT DRAFT]

jj. Liens of federal government obtained by title vesting. See Manne Midland Bank v. United States, 687 F. 2d 395, 397, 404 (Ct. Cl. 1982), cert. den. 460 U.S. 1037 (1982).

[TO BE ADDED IN SUBSEQUENT DRAFT]

Endnotes

37 This analysis last updated 5/1/2008. Back

38 This analysis last updated 12/1/2010. Back

39 This analysis last updated 12/1/2010. Back

40 This analysis last updated on 12/1/2010. Back

41 This analysis last updated on 5/1/2008. Back

42 This analysis last updated on 5/1/2008. Back

43 This analysis last updated on 12/1/2010. Back

44 This analysis last updated on 5/1/2008 Back

II-F. Liens on Particular Types of Personal Property Collateral / Table of Contents