Both notices recorded in "the public records" which is probably the key phrase here.  There are many public records which are not the Grantor-Grantee Indices of Official Records of the County.  The building and planning department that issued the fine failed to record a lien or notification in the title records, so they claim should indeed not be honored as payable through escrow. 

  Whether or not the new homeowners have a claim against their home inspector is another possible direction for them to explore.  Did they pay to have him/her/them check the zoning, the CC&R's and other code compliance issues or not (probably not)?

  The building department was negligent in that they didn't do their own due diligence in collecting on or enforcing properly on behalf of their department and in doing so created a legal problem for the taxpayers of their county and state.  What few more dollars would it have taken to have such an important notice sent out with certified mail & signature required so that the public agency file would contain proof of delivery to the prior owners or their agents;  or alternatively, what few more (taxpayer) dollars to have an important notice processed served?  No proof of delivery, despite being a "public record", sounds like negligence to me.

  Incompetent bureaucrats, really.