131 Nev., (Advance Opinion 42), 351

Nevada Department of Taxation, Appellant,


Kawahara, Respondent.

Nevada Department of Taxation v. Kawahara, 131 Nev. (Adv. Opin. 42), 351 P.3d, 746 (June 25, 2015). This is a very interesting opinion, en banc (by the entire court, not just a panel). For over a year, I asked every lawyer and judge I spoke to how this case should be resolved. They all got it wrong! But, as the Nevada Supreme Court held: I was right.

Question: Which has priority to the remaining proceeds on the sale of a home, my client's executed but unrecorded deed of trust, or a later recorded tax (judgment) lien? In law school, lawyers learn: "First in time, first in right." That typically means that the first deed or encumbrance to be recorded has priority (first right to the property or its proceeds.) The reflexive answer from the lawyers I queried about this matter was consistent: the tax/judgment lien wins and my client loses because the tax lien was recorded first. They all thought I was crazy. But they were wrong!

When a property owner signs a deed and delivers it, those acts convey the seller's interest in the property, right then and there, period. However, if the original owner then executes a later deed (a document of "equal dignity"), and the second deed gets recorded first, the second deed wins because of the recording statutes. That is called "race notice." Because the law wants to promote finality in real estate transactions, the holder of the first deed would have a lawsuit against the seller, but would lose the property if that second deed got recorded first. However, until such time as the seller signs a second deed (i.e., the first buyer just doesn't record the deed), there is n problem. The first buyer owns the property.

In this case, the place where the analysis of the other lawyers broke down was that a deed of trust, like a deed, becomes effective immediately upon execution and delivery. Further, it is a specific lien, meaning that the creditor has specifically bargained for a lien against the debtor's equity in the specified asset. A tax lien, on the other hand, has the same effect as a judgment lien. That is, it operates as "dragnet" attaching only to whatever net equity the debtor might still have at the time the lien attaches.

("Attachment" occurs when the deed of trust is executed, but as to a judgment or tax lien, attachment occurs at recordation.)

What this shows is that liens, their attachment to collateral, and the resulting rights to the collateral, or its proceeds, are very complicated and require the kind of attention to detail and experience that only the best lawyers can bring to bear for their clients. Finally, you can probably use the facts of this case to win a few bar bets. But be careful: the facts need to be precisely stated. Further, the recording statutes in Nevada do not protect judgment creditors. In a minority of states they do.

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