North Carolina is a "pure race" state, for real estate title purposes.  That is, “first to record an interest in land holds an interest superior to all other purchases for value, regardless of actual or constructive notice as to other, unrecorded conveyances.” Rowe v. Walker, 114 N.C. App. 36, 441 S.E. 2d 156 (1994).  As any race, the first to the finish line -- or, in this case, the proper register of deeds -- wins.

That's generally true.  Generally speaking, that's true.  Well, the North Carolina Court of Appeals issued a decision the other day in Henkel v. Triangle Homes, Inc., COA15-1123 (September 20, 2016), in which the Court notes:  "Winning the race to the courthouse does not upset the rules of lien priority established by state and federal law, including federal preemption when those laws conflict."  That is, though you might cross the finish line first, you can't win the race unless you pay by the rules.  In this case, deed to real property obtained at a foreclosure sale without notice to the United States does not extinguish a pre-existing federal tax lien on the property.

The Court of Appeals gives a very effective, straightforward analysis, which we repeat here:

Generally, foreclosure of a senior lien extinguishes all junior liens. Dixieland Realty Co. v. Wysor, 272 N.C. 172, 175, 158 S.E.2d 7, 10 (1967) (“Ordinarily, all encumbrances and liens which the mortgagor or trustor imposed on the property subsequent to the execution and recording of the senior mortgage or deed of trust will be extinguished by sale under foreclosure of the senior instrument.”) (citing St. Louis Union Trust Co. v. Foster, 211 N.C. 331, 190 S.E. 522 (1937)). To ensure a valid foreclosure sale, a senior lien holder must follow certain procedures. N.C. Gen. Stat. § 1-339.1 et seq. governs the procedures for judicial foreclosure sales, however, where property is subject to a federal tax lien, federal law imposes additional procedures. The general rule making federal tax liens inferior to local tax liens applies only when the United States is provided prior notice of a foreclosure sale arising from a local tax liability. 26 U.S.C. § 7425(a) (2012) provides that a senior lien holder foreclosing on property subject to a federal tax lien must provide the United States with notice prior to the foreclosure sale. If the United States has not been provided notice of a judicial foreclosure proceeding, any federal tax lien on the foreclosed property remains undisturbed....  Therefore, a foreclosure proceeding and sale will not disturb or extinguish a previously recorded federal tax lien unless the United States is properly notified and made a party to the proceeding.

The undisputed facts further establish that the United States was not made a party to the judicial foreclosure proceedings that followed the Default Judgment. Therefore, the federal tax liens survived the judicial foreclosure sale and Defendant took the Parcel subject to these liens.

Of course, the flip side of the facts in this case is that with proper notice to the federal government, purchase at a foreclosure sale conducted pursuant to unpaid local taxes will extinguish the federal tax lien.  If you paid attention to the facts of the case, the purchase price at the local foreclosure sale was $6,673.73 (a $2,575.16 in local tax lien) while the purchase price at the federal tax lien foreclosure sale was $172,000.00 ($888,765.42 and $877,490.42 in federal tax liens).  It can be safely assumed that federal tax liens will almost always be larger than local tax liens -- oftentimes, significantly larger, as in this case.  So, with notice, you can extinguish some hefty liens for a small amount.

It pays to give notice.