KHVPF Insight

Who’s First? Lien Distinctions And Priorities

Who’s First? Lien Distinctions And Priorities

While the State of Michigan recognizes a number of different liens with respect to real and personal property, it is important to understand that not all liens are created equal. Generally, Michigan is a “recording priority” jurisdiction (i.e., liens are prioritized in the order in which they are recorded); but that does not mean first-in-time will always be first-in-right. Instead, Michigan law contains nuances depending on the type of lien that will determine a lien’s priority. This article will briefly highlight the basic distinctions between real and personal property tax liens, state and federal tax liens, judgment liens, and construction liens.

Real and Personal Property Tax Liens. The Michigan General Property Tax Act (GPTA) creates a statutory lien for unpaid real and personal property taxes. It states that “the people of this state have a valid lien on the property, with rights to enforce the lien as a preferred or first claim on the property.”

Real and personal property tax liens take priority over all other liens on that property including first-in-time mortgages. Property taxes (real and personal) become a first priority lien on December 1 following Tax Day (the prior December 31). Real and personal property tax liens only attach to the property on which the tax was levied, and have a superior priority over any other liens on the specific property on which the tax was levied no matter when the liens are recorded. They will, for example, always be superior to a mortgage on the property.

State and Federal Tax Liens. State tax liens are governed by a separate Michigan statute which creates a state tax lien in favor “of the state against all property and rights of property… owned at the time the lien attaches, or afterwards acquired by any person liable for the tax, to secure payment of the tax.” The statute further provides that the lien “shall take precedence over all other liens and encumbrances, except bona fide liens recorded before the date the lien under this act is recorded.” This statute follows the first-in-time, first-in-right approach with a caveat of actual knowledge, meaning a majority of liens recorded before the date of the state tax lien will be superior unless someone has actual knowledge of the state tax lien. For example, a mortgage recorded before a state tax lien becomes effective has priority over that subsequent state tax lien, unless the party holding the mortgage has actual knowledge of an unrecorded tax lien.

Federal law establishes the priority of federal tax liens and has different rules. A federal tax lien attaches to all property and rights to property of the taxpayer as well as against any person who later acquires an interest in the taxpayer’s property. A federal tax lien will not have priority over a prior recorded mortgage on real property if the mortgage is properly recorded with the register of deeds. Federal tax liens will not, however, have priority over real property tax liens.

Judgment Liens. A judgment lien generally follows the first-in-time, first-in-right recording rule. Before a judgment lien can take effect, a party must obtain a money judgment from a court. The party must then record the judgment lien with the register of deeds where the specific property is located and give the affected party notice of the recording. A judgment lien remains in existence for five years after it is recorded, and may be recorded once more for an additional five years. A judgment lien will not have priority over a mortgage that was recorded first on a property.

Construction Liens. The date a construction lien attaches to property, for purpose of determining priority, is the date of the first actual physical improvement made on the property. The Michigan statute creating construction liens states that it “shall take priority over all other interests, liens, or encumbrances” that might attach to the building, structure, or improvement, or upon the real property on which it is erected. A lien that is recorded after the first actual physical improvement will be inferior to a construction lien even if the construction lien is recorded later. The priority of the construction lien is of course limited to the scope of the project referred to in the original notice.

Because the rules of lien priority under Michigan law vary significantly depending on the type of lien, it is a mistake for a lienholder to assume the general rule of first-in-time, first-in-right will apply to a particular lien. Recognizing the differences will help the lien-holder discern how best to protect its interest, whether it is filed first-in-time or not.

Joseph C. Pagano
Summer 2019