COMMONWEALTH OF KENTUCKY VS. CENTRAL BANK OF JEFFERSON COUNTY, INC. , ET AL.
Annotate this Case
Download PDF
RENDERED: MAY 9, 2008; 2:00 P.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2007-CA-000009-MR
COMMONWEALTH OF KENTUCKY,
FINANCE & ADMINISTRATION CABINET,
DEPARTMENT OF REVENUE,
f/k/a REVENUE CABINET
APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE LISABETH HUGHES ABRAMSON , JUDGE
ACTION NO. 06-CI-000331
v.
CENTRAL BANK OF JEFFERSON COUNTY, INC.,
f/k/a FIRST BANK, INC.; SHANNON FOSTER, a/k/a
SHANNON E. MCDONALD FOSTER; STEVE J. FOSTER;
HOLLOWAY & SON CONSTRUCTION, LLC;
DEBRA B. COPELAND; and HAGAN AUTOMOTIVE TIRE,
a/k/a HAGAN AUTOMOTIVE & TIRE, INC.
APPELLEES
NO. 2007-CA-000833-MR
COMMONWEALTH OF KENTUCKY,
FINANCE & ADMINISTRATION CABINET,
DEPARTMENT OF REVENUE,
f/k/a REVENUE CABINET
v.
APPELLANT
APPEAL FROM BULLITT CIRCUIT COURT
HONORABLE RODNEY BURRESS, JUDGE
ACTION NO. 04-CI-01100
WELLS FARGO BANK, MINNESOTA, N.A.;
JOSEPH A. CLARK; JANET M. CLARK, a/k/a JAN
CLARK; GE CAPITAL FINANCIAL, INC.; UNITED
STATES OF AMERICA; ARTHUR SULLIVAN; and
STANDARD FEDERAL SAVINGS BANK
APPELLEES
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: DIXON AND NICKELL, JUDGES; KNOPF,1 SENIOR JUDGE.
KNOPF, SENIOR JUDGE: In each of the two present appeals, the Commonwealth of
Kentucky, Department of Revenue (“DOR”) seeks to be given priority as lien holder
before a mortgage. Our resolution of the issue presented requires us to determine the
following issues: 1) does a tax lien lose its priority when another lien takes an earlier
filing date through the process of equitable subrogation; and 2) do purchase money
mortgages take preference over a prior-recorded general tax lien.
Although the issues in these two cases are distinct, they each pertain to
the special preference, if any, granted to tax liens, and therefore will be addressed
together.
I. BACKGROUND
COMMONWEALTH v. CENTRAL BANK, ET AL.
On July 11, 2001, the DOR filed a general state tax lien against Steve J.
Foster in the Jefferson County Clerk’s office. On July 26, 2001, Steve and Shannon
Foster executed a promissory note (note I), secured by a mortgage on real property in
favor of Central Bank of Jefferson County, Inc. (“Central”). The mortgage was recorded
in the Jefferson County Clerk’s office on August 17, 2001. The Fosters also executed a
note evidencing a line of credit (note II) by Central. Note II was secured by a mortgage
on the property recorded on August 17, 2001. The Fosters used a portion of note I to
satisfy a mortgage on the real property held by Commonwealth Bank & Trust Company2
1
Senior Judge William L. Knopf sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statutes
21.580.
2
CBT’s mortgage was recorded on August 17, 1998, in the Jefferson County Clerk’s office. It
was released by a Deed of Release recorded on August 20, 2001.
-2-
(“CBT”) and the remainder of the note to pay off ad valorem taxes.3 On September 6,
2001, the DOR filed a general state lax lien against Shannon.
On January 12, 2006, Central initiated a foreclosure action in circuit court
against real property owned by Steve and Shannon. Central moved for summary
judgment, asserting that its mortgage should be awarded first priority over the other
liens on the property.4 Central argued that because the proceeds from note I were used
to satisfy CBT’s mortgage and the ad valorem taxes, that its mortgage for note I should
be equitably subrogated to those liens. On June 13, 2006, a hearing was held before
the master commissioner (“MC”). On June 19, 2006, the MC issued a report, setting
forth his recommendations and finding that Central’s first mortgage, on note I, was
equitably subrogated to CBT’s mortgage and the ad valorem tax liens to the extent that
the proceeds from note I were used to satisfy such.
The DOR filed exceptions to the MC’s report, claiming that equitable
subrogation is not the law in Kentucky and asserting a super priority pursuant to KRS5
134.420. Central also filed exceptions, pointing out that the MC had failed to address
certain issues in his report. On August 15, 2006, the MC conducted a second hearing
and on August 28, 2006, issued a new report, recommending that the exceptions of the
DOR be denied. On November 30, 2006, the Jefferson Circuit Court entered a
judgment and an order of sale, directing the proceeds from the sale to be distributed in
the following priority: 1) to the costs of the action; 2) to satisfy that portion of Central’s
lien on note I, accounted for as equitable subrogation, until paid; 3) to satisfy that
Three liens for ad valorem taxes were recorded, on a certain date unknown, but prior to the
CBT mortgage lien.
3
Several other liens, from: Holloway & Son Construction, LLC; Debra B. Copeland; and Hagan
Automotive Tire, were placed on the property but were released on January 24, 2006, January
17, 2006 and January 12, 2006, respectively.
4
5
Kentucky Revised Statutes.
-3-
portion of Central’s lien on note II, accounted for as equitable subrogation, until paid; 4)
to satisfy the balance of Central’s liens, as adjudicated and the DOR’s liens, as
adjudicated, equally; and 5) any remaining proceeds to be held for the remaining
defendants as their interests may be adjudged. The DOR subsequently filed this
appeal.
COMMONWEALTH v. WELLS FARGO, ET AL.
On June 14, 1996, the DOR filed a general state tax lien in the Bullitt
County Clerk’s office against Joseph A. Clark. At this time, Joseph did not own property
in Bullitt County, Kentucky. On November 16, 2001, Joseph and Janet Clark acquired
property with the help of a purchase money mortgage from Provident Bank, recorded on
November 29, 2001. The mortgage was assigned to Wells Fargo Bank, Minnesota,
N.A. (“WFB”) by an assignment recorded on February 14, 2003. Subsequently, the
DOR filed two more general state tax liens against Joseph on August 24, 2004, and
October 20, 2004. On November 9, 2004, WFB filed a mortgage foreclosure action in
Bullitt Circuit Court, against the real property owned by Joseph and Janet. On April 9,
2007, the circuit court cited to Kentucky Legal Systems Corp. v. Dunn, 205 S.W.3d 235
(Ky.App. 2006) and ruled in favor of WFB, giving its mortgage first priority of the
proceeds from a master commissioner’s sale over the prior recorded lien of the DOR.
The DOR challenges that decision in this Court.
-4-
II. ANALYSIS
GENERAL LIEN PRIORITY
It is well settled that the general rule, when it comes to lien preference, is
first in time, first in right. Indiana Truck Corporation of Kentucky v. Hurry Up Broadway
Co., 1 S.W.2d 990 (Ky.App. 1928). Under this rule, the first creditor to file their lien
against a debtor has the first right to the debtor’s property. “All bona fide deeds of trust
or mortgages shall take effect in the order that they are legally acknowledged or proved
and lodged for record.” KRS 382.280. However, it has also been held that the
legislature may create statutory liens and establish their priorities. Midland-Guardian
Co. v. McElroy, 563 S.W.2d 752 (Ky.App. 1978).
The law in Kentucky is quite clear that a recorded mortgage
takes priority over any subsequent creditors. KRS 382.270,
KRS 382.280. It is equally clear that the legislature may
create statutory liens and establish the priorities thereof.
However, as stated in 51 Am.Jur.2d Liens s 57, in the
absence of a statute giving precedence to a statutory lien, its
relative rank is determined under the general principle of first
in time first in right . . .
Id. at 754 (internal citations omitted).
Tax liens are statutorily created by KRS 134.420, which reads, in relevant
part:
(2) If any person liable to pay any tax administered by the
Department of Revenue, other than a tax subject to the
provisions of subsection (1) of this section, neglects or
refuses to pay the tax after demand, the tax due together
with all penalties, interest, and other costs applicable
provided by law shall be a lien in favor of the Commonwealth
of Kentucky. The lien shall attach to all property and rights to
property owned or subsequently acquired by the person
neglecting or refusing to pay the tax.
(4) The tax lien imposed by subsection (2) of this section
shall not be valid as against any purchaser, judgment lien
creditor, or holder of a security interest or mechanic's lien
until notice of the tax lien has been filed by the commissioner
of the Department of Revenue or his delegate with the
-5-
county clerk of any county or counties in which the
taxpayer's business or residence is located, or in any county
in which the taxpayer has an interest in property. The
recording of the tax lien shall constitute notice of both the
original assessment and all subsequent assessments of
liability against the same taxpayer. Upon request, the
Department of Revenue shall disclose the specific amount of
liability at a given date to any interested party legally entitled
to the information.
(Emphasis added).
EQUITABLE SUBROGATION
The doctrine of equitable subrogation has long been recognized in
Kentucky. Louisville Joint Stock Land Bank v. McNeely, 102 S.W.2d 389 (Ky.App.
1937). The doctrine is the practice of which a creditor who pays debt for which another
is primarily responsible is substituted, or subrogated, to all rights and remedies of the
original creditor. Black’s Law Dictionary, 6th ed. 1990, 539. In the case of
Commonwealth v. Central Bank, et al., the MC, finding the facts to be identical to
McNeely, supra, granted Central first priority, to the extent their loan paid off CBT’s lien.
The issue which this presents to the Court is: does a lien, given preference by way of
equitable subrogation, remain preferential over a later-filed tax lien? We hold that it
does not.
This Court has held that under KRS 134.420(2) a tax lien has preference
over a purchase money mortgage, when tax liens were filed prior to the mortgage.
Liberty Nat. Bank and Trust Co. of Louisville v. Vanderkraats, 899 S.W.2d 511 (Ky.App.
1995). Priority is given to a bona fide purchaser until the tax lien is filed, at which time
the DOR is given priority. Id. The Court also held that a lender has an opportunity to
protect itself by requiring that tax liens be fulfilled prior to lending money, a protection
extended by the filing requirement of KRS 134.420(2). Id. The holding of Vanderkraats,
supra, was later reiterated by the Court, when again holding that the DOR has priority
-6-
over subsequent mortgages. Com., Revenue Cabinet v. Hall, 941 S.W.2d 481 (Ky.App.
1997).
In the case sub judice, Central was given notice of the tax obligation prior
to filing their mortgage. The protection created by the statute is for those parties that
are not on notice. Therefore, equitable subrogation will not defeat priority given by
statute, because the subrogation does not make the notice cease to exist.6
PURCHASE MONEY MORTGAGES
In Commonwealth v. Wells Fargo Bank, et al., the trial court, looking to
Dunn, 205 S.W.3d at 236, found that a purchase money mortgage is superior to all
other liens. We disagree. The Court in Dunn, held:
[a] vendor's purchase money mortgage is senior to any
previous judgment liens that arise against the purchasermortgagor. This is true even though a judgment attaches as
a lien to the judgment debtor's after-acquired real estate and
the vendor takes the mortgage with actual knowledge of the
judgment. . . . Because this long-established rule makes it
unnecessary for a purchase money lender to examine for
preexisting judgments and other liens against the purchasermortgagor, it reduces title risk in connection with such
transactions and thus encourages purchase money financing
by vendors. Moreover, the rule is justified on grounds of
fundamental fairness.
Id. The case sub judice is distinguishable from Dunn, because the lien present here is a
tax lien, not a judgment lien. At oral argument, it was argued by Central that tax liens
work like judgment liens. We disagree. Judgment liens and tax liens are created by
two different statutes. Judgment liens are created by KRS 426.720, which does not, like
the tax lien statute KRS 134.420, create a priority for them. As previously discussed,
KRS 134.420 creates a priority for tax liens upon filing, specifically because a later-filing
lender has notice. Furthermore, judgment liens are typically created when one party
See also Louisville/Jefferson County Office for Economic Development v. Manufacturers And
Traders, 2004 WL 259083 (Ky.App. 2004), in which the Court held that equitable subrogation
does not defeat a priority when there was notice of a prior lien and no subordination agreement
existed.
6
-7-
receives a benefit, such as property or services, from a voluntary lender and fails to
compensate the lender for it. The DOR, which provides benefits for all of the
Commonwealth, is not a voluntary lender. Our position is further supported by the
language in Dunn, which states:
we hold that Kentucky should adopt this logical rule that third
parties who lend money used to purchase real estate in
exchange for a mortgage hold special priority over all other
recorded liens and judgments except where agreed
otherwise by the parties or specified by statute.
Id. at 237 (emphasis added). We believe that the priority created by KRS 134.420 is
exactly the type of exception accounted for in the holding of Dunn and addressed by the
prior holdings of Vanderkraats, supra and Hall, supra, as further evidenced by the
Court’s failure to address either of those prior-decided cases relating to tax liens.
III. CONCLUSION
Based on the foregoing, we hold that the circuit courts erred in re-ordering
the lien priorities. Accordingly, we reverse the November 30, 2006, judgment of the
Jefferson Circuit Court and remand this matter for entry of an order in conformity with
this opinion. Additionally, we reverse the April 9, 2007, judgment of the Bullitt Circuit
Court and remand this matter for entry of an order in conformity with this opinion.
ALL CONCUR.
-8-
BRIEFS AND ORAL ARGUMENT
FOR APPELLANT:
BRIEF AND ORAL ARGUMENT FOR
APPELLEE, CENTRAL BANK:
Barbara Curtin Kenney
Commonwealth of Kentucky
Frankfort, Kentucky
Jennifer Hatcher
Ackerson & Yann, P.L.L.C.
Louisville, Kentucky
BRIEF FOR APPELLEE, WELLS
FARGO BANK:
John W. Wooldridge
David E. Johnson
Shepherdsville, Kentucky
ORAL ARGUMENT FOR APPELLEE,
WELLS FARGO BANK:
John W. Wooldridge
Shepherdsville, Kentucky
-9-
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
