ComplianceFinanceApril 17, 2024

The value of court searches in due diligence

By: Wolters Kluwer Compliance Solutions staff

A civil suit or bankruptcy case can be a hidden treat—one that might affect your debtor’s assets and security. 

Pulling a credit report and searching for liens do not give you a complete picture of a debtor’s creditworthiness. Local state and county lien filings do not include court cases; thus, standard lien searches, such as UCCs, tax liens, and judgment liens, do not represent the full view of the debtor's standing. You must perform specific court case searches—and that means checking the courthouses in the relevant jurisdictions for the debtor for cases to evaluate the risk.

Understanding due diligence

Before companies decide on large purchases, mergers, acquisitions, entering a partnership, or lending money, they investigate and assess the risks and opportunities associated with those transactions. Due diligence is a comprehensive examination of all the factors that could affect the transaction and allows businesses to make informed decisions and mitigate risks.

Due diligence is gathering information relevant to the entity or assets involved in the transaction. It can include several aspects, including but not limited to:

  • Financial performance
  • Legal compliance
  • Regulatory compliance
  • Market position
  • Operational efficiency
  • Potential liabilities
  • Fair value of the target company
  • Identifying potential integration challenges
  • Assessing strategic fit
  • Evaluate management teams
  • Evaluate the strengths and weaknesses of an opportunity
  • Assess market dynamics
  • Forecast potential returns
  • Intellectual property rights

The goal of due diligence is to uncover anything that can affect the transaction or increase risk. Due diligence also helps locate any past, present and possibly future legal issues that could cause additional risk or liability.

Active cases against the debtor could have a significant impact on the debtor’s assets or position. These cases are not recorded in public records – the only way to locate these hidden threats is to do court searches for civil suits, criminal actions, and bankruptcy cases.

Types of court searches

When doing your due diligence, you need to check all courts for open cases. Bankruptcies are always filed in federal bankruptcy courts, and litigations are filed in local county courthouses and in U.S district courts. 

Bankruptcy filing search

While you can look up bankruptcy public records, you must log into the bankruptcy court to see ongoing cases. The types of cases you’ll find in a bankruptcy court case search include:

  • Chapter 7 Liquidation: Individuals, businesses and certain organizations may file Chapter 7 liquidation.
  • Chapter 9: Municipalities who file bankruptcy can file under Chapter 9, which allows them to restructure their debts and obligations.
  • Chapter 11 Reorganization: Mostly businesses file under Chapter 11, though some individuals with high asset worth, such as several homes, can file under Chapter 11.
  • Chapter 12: Some family farmers or fishermen can restructure debts under Chapter 12 and continue to run their businesses.
  • Chapter 13 Reorganization: In most cases, individuals file Chapter 13 to restructure debts, but some smaller businesses and self-employed people may file Chapter 13.
  • Adversary Proceedings: These cases are disputes related to bankruptcy proceedings, such as fraudulent transfers, challenges to discharge debts, or creditor objections to the debtor’s repayment plan.
  • Trustee Actions: Bankruptcy trustees can initiate an action against a debtor to recover assets or funds for creditors. These cases often include fraudulent conveyances, preferential transfers, or going after third parties.
  • Miscellaneous Cases: The bankruptcy court can also hear debtor/creditor disputes, such as collateral disputes and dischargeability of certain debts.

Completing a thorough bankruptcy case court search ensures you locate all types of actions against a debtor.

Civil court case search

Federal, state, and county courts have ongoing civil cases, including real estate cases, contracts, family law cases, and more. Business cases are usually in state courts but may be found in federal courts.

Criminal court case search

Criminal cases can affect a transaction, especially if the debtor is found guilty.

Managing risks through comprehensive court searches

Running a complete judiciary case search in all courts ensures you find any lawsuit against a debtor. However, it would take weeks to go through every court in every county of every state.

Outsourcing your judiciary case searches to a professional service provider ensures you find court cases that could increase the risk of continuing with a transaction.

Court searches play an essential role in due diligence, providing critical insights into risks and liabilities you may not learn about until after the transaction. Types of litigation court searches can uncover include:

  • Lawsuits, including tort claims, contract disputes, and employment disputes
  • Judgments
  • Liens
  • Bankruptcies
  • Regulatory actions
  • Real estate disputes
  • Intellectual property disputes
  • Criminal actions
  • Traffic actions

You can make informed decisions when you uncover these hidden risks during the due diligence process. If you choose to move forward, you can address and mitigate potential liabilities to protect your interest in the investment or transaction.

Maximizing due diligence with effective court search strategies

The ability to conduct an effective court search maximizes your due diligence efforts. It provides crucial insights into risks and liabilities that may hinder the transaction or cause the failure of the business endeavor or transaction.

Comprehensive court searches can enhance your decision-making process and safeguard your interests. For court searches to be effective, they must be comprehensive and include various types of legal records and proceedings related to the entity or transaction. You cannot effectively protect your interests without locating all types of court cases.

Working with a vendor with the experience and expertise to tailor search parameters to relevant issues and jurisdictions means you will receive meaningful results. Additionally, the advanced technology some vendors use to conduct court records searches streamlines the process of retrieving and analyzing legal records, saving your company time and money. Court case searches are more timely and more thorough.

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Wolters Kluwer Compliance Solutions staff
The Compliance Solutions staff is comprised of experts who offer the insight required to better satisfy borrowers, secure capital, and navigate regulatory change.
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