In this “Back-to-Basics” post we continue our due diligence focus on the non-consensual liens of tax liens and judgments liens. Tax and judgment liens ordinarily apply to the same types of property covered by UCC liens.
However, they are not consensual and they can be on file without the debtor having any knowledge of their existence. Thus, it is not enough to ask the debtor about tax and judgment liens. Creditors must be diligent in discovering their existence themselves.
Although this may seem surprising, it is not uncommon for large corporations to not know about judgment liens. With the many corporate reorganizations, mergers, acquisitions, changes in outside counsel and the like, management of large corporations may indeed not know to whom they owe debts in cases related to judgments and litigation.
For example, executives for a large business entity were preparing the disclosure schedule for a large financing deal, but had no idea of the existence of prior outstanding judgment liens. The judgment creditors had been able to secure the liens as a result of non-responsiveness from the business. Apparently, these cases had gone unnoticed by management and their counsel in the years prior. Because this judgment lien had priority, the prospective borrowers and lenders discovered that there was no property to offer to secure the loan.
The diligent lender will certainly want to know about tax and judgment liens before advancing any funds. Making tax lien searches and judgment lien searches a routine part of the due diligence process will take care of this.