Always search by the debtor’s correct legal name. This is an absolute necessity, and can often be quite complicated. Also, it is strongly recommended that you search under any former names that a debtor may use. Even though the entity may no longer operate under those names, there may be active filings under the former names.
For a complete search, we recommend searching for additional types of liens beyond UCC.
- UCC liens – This search will look for any UCC filings that may have been filed by another secured party.
- Federal tax liens – Federal tax liens are also known as IRS tax liens.
- State tax liens – State tax liens can include employment tax liens from the state.
- Judgment liens – Judgment liens are filed as the result of a judgment from a court case.
- Litigation searches – This type of search will look for any open/pending suits involving your debtor. The outcome of the case may affect your lien position. Litigation searches are done at the federal and state/county level.
Some service providers offer different types of search packages, for example, the four-part search, which includes UCCs, federal tax liens, state tax liens, and judgment liens. This four-part search is performed at the county level in addition to a state UCC search.
What is the importance of searching for other lien types? In general, a four-part search should be part of any thorough due diligence investigation, and is critical to the “discovery” process. Can you imagine going to a closing having conducted only a UCC search, only to find after the closing that a tax lien was on the property just acquired?
With tax liens, the lien follows the property. The acquiring party has just acquired the lien. Note also that tax liens and judgment liens differ from UCC liens.
UCC liens are consensual in nature; many healthy, thriving businesses have UCC liens on their personal property. A UCC lien is public notification that a debtor has agreed to the secured party putting a lien on property to ensure their interest in that property.
Tax liens and judgment liens, however, are not consensual. If a tax lien is put on an individual or business’s property, it represents non-payment of taxes by that entity. If a judgment lien has been put on that entity’s property, a judgment has been rendered against the party. This is definitely information you would want to have in-hand upon completion of your search.
What is the importance of searching for pending litigation and judgments? Again, a litigation search should be a part of any thorough due diligence investigation, and is critical to the “discovery” process.
As mentioned before, there may be active cases pending against the debtor in a transaction. The outcome of these cases may have a significant bearing on the position of the debtor or the value of its assets. Moreover, litigation can be a hidden threat, since there may not be a lien filed in conjunction with the final judgment. Searching in the courts is the only way to be aware of the cases.