CT Lien Solutions Blog

April jurisdictional holidays

Set forth below is the State Holiday List for the month of April 2012. As always, please bear in mind that these dates are accurate as of the date of publication, but subject to change as states often make last minute revisions to their holiday closing schedules.

State	Holiday	Date
CT, DE, HI, IN, LA, NJ, NC, ND, SD, TN	Good Friday	April 6
ME, MA	Patriot’s Day	April 16
DC	DC Emancipation Day	April 16
AL, GA	Confederate Memorial Day	April 23
NE	Arbor Day	April 27
MS	Confederate Memorial Day	April 30

Advanced due diligence series – #8: Patriot Act and U.S. economic sanctions program searches

This is the eighth and final part in our advanced due diligence series, and it focuses on Patriot Act and U.S. economic sanctions program searches. We hope you’ve also read the prior posts in this series and used them to begin developing a more comprehensive due diligence strategy to protect your investments. To learn how CT Lien Solutions can help, e-mail info@ctliensolutions.com.

Patriot Act searches are a vital part of due diligence searching with any financial transaction. Section 326 of the Patriot Act requires banks to have a written Customer Identification Program (CIP). The CIP must be incorporated into the bank’s Bank Secrecy Act/Anti-Money Laundering compliance program, which is subject to approval by the bank’s board of directors. The CIP must include procedures for determining whether a potential or current customer appears on any federal government list of known or suspected terrorists, terrorist organizations or is otherwise subject to a U.S. economic sanctions program. The federal government’s list of people and companies subject to a sanctions program is called the Specially Designated Nationals and Blocked Person List (SDN). The U.S. Treasury’s office of Foreign Asset Control (OFAC) maintains the SDN List.

While Patriot Act and economic sanctions program searches have only an indirect bearing on determining a debtor’s creditworthiness or securing collateral for financing, failure to include them in a solid due diligence plan could result in onerous penalties. Although OFAC has yet to impose a fine upon a lender for extending credit to a person on the SDN list, the statute underlying the SDN list provides specific authority to impose just such a fine.

In conclusion to our series, thorough due diligence is more essential than ever, and is not an area to scale back or cut corners on. By taking a few additional measures, financial institutions, leasing companies, commercial finance organizations and their legal counsel can better protect themselves against foreclosures and large write downs. Lenders can improve the strength of their portfolios, and potentially increase their competitive advantage.

Again, to learn how CT Lien Solutions can help, e-mail info@ctliensolutions.com.

Advanced due diligence series – #7: Monitor UCC filing activities

This seventh part in our advanced due diligence series focuses on monitoring UCC filing activities. Be sure to read the prior posts in this series as well for more advanced due diligence tips.

UCC filing monitoring notifies a lender if another secured party tries to amend, continue or terminate the lender’s own UCC filing. It’s important to track any change to UCC filings which could undermine a lender’s position. Staying on top of this enables a quick response and can protect the filer’s interest.

UCC filing monitoring is particularly important because when Revised Article 9 became effective, signatures were no longer required for UCC filings. Many lenders became concerned about the possibility of a third party accidentally terminating their filing and of the increased possibility for fraud. Monitoring not only allows lenders to determine if other secured parties are adversely affecting their filings, but allows them to ensure that they have not inadvertently terminated a filing from within their own operations.

UCC filing monitoring also notifies the lender of UCC filings made by another secured party. A brief example illustrates the importance of this type of monitoring. A bank had encountered a fraudulent debtor who had secured two loans simultaneously for the same collateral, one from them and one from another bank. Unknowingly the first bank continued to extend funds to the debtor until the debtor “maxed out” the credit line. The bank also found out that they were not in priority position for the secured assets. This could have been avoided with routine UCC monitoring. Incidentally, a “search to reflect,” as noted in #5 of this series, could have also caught the fraud.

There are other benefits to ongoing monitoring. For example, secured lenders who have particular restrictions in their security agreements—such as a clause that restricts a debtor’s ability to secure alternative financing—can use this as a vehicle to monitor compliance. Another benefit to monitoring UCC filings would be to receive notice of correction statements (from the filing office or a private party).

Check back tomorrow for the eighth and final part in our advanced due diligence series: Patriot Act and U.S. economic sanctions program searches.

Advanced due diligence series – #6: Monitor borrowers’ business entity status

This sixth part in our advanced due diligence series will focus on monitoring a borrower’s business entity status. Be sure to read the prior posts in this series as well for more advanced due diligence tips.

It is important for lenders to learn of changes to a borrower’s name and to learn if the business organization is no longer in good standing in its formation state. Not all borrowers notify lenders of these changes. This is true even though most security agreements include mandatory notification clauses and require debtors to respond to regular inquiries regarding their affairs. However, enforcing these requirements can be a challenge.

Even so, Article 9 of the UCC has very specific rules for continued perfection that require the lender to make certain filings, within certain timeframes, when a debtor changes its name, location, or both, so lenders must stay aware of these changes.

The solution is for lenders to proactively monitor borrowers themselves. Business entity monitoring provides notification to the lenders of name or status changes. In the case of a registered entity debtor, the lender may also monitor new corporate, LLC, etc. filings, and amendments to existing filings. With defaults too prevalent in today’s economy, monitoring is an important best practice.

Check back tomorrow for the seventh part in our advanced due diligence series: monitoring UCC filing activities.

Advanced due diligence series – #5: Order a “search-to-reflect” after conducting a UCC filing

This fifth part in our advanced due diligence series will focus on the value of conducting a “search-to-reflect.” Be sure to read the prior posts in this series as well for more advanced due diligence tips.

Filing offices are not immune from human error. Errors occur in indexing the filing type, and in listing the debtor and secured party names. Whether the error occurred in the original filing, or at the filing office, filers can uncover and correct such errors by ordering a search-to-reflect.

A secured party derives two key benefits from a search-to-reflect. The first is to confirm both the perfection and priority of the filing. A Revised Article 9-compliant search-to-reflect will disclose all legally effective UCC filings—that is, all filings that are not considered “seriously misleading” due to incorrect debtor names. And, once the search is conducted, a filer can be assured of its position relative to any other UCC filings on the same collateral. The second benefit is to confirm that the jurisdiction has correctly indexed the debtor, filing type and secured party names.

For full peace of mind, a search-to-reflect should also include copies of the original filings. This full search gives the original filers and any subsequent searchers the opportunity to correct any errors found in the filings. All lenders benefit from conducting a search-to-reflect, but particularly do SBA lenders—because of the SBA guidelines and guaranty—and creditors who are involved with high dollar-value or high-risk deals.

Check back tomorrow for the sixth part in our advanced due diligence series: monitoring a borrower’s business entity status.

Advanced due diligence series – #4: Conducting court searches to reveal credit risk

This fourth part in our advanced due diligence series focuses on conducting court searches. Be sure to read the first, second and third posts in this series as well!

Court searches are the best way to reveal the credit risk posed by civil suits and bankruptcy cases. These open court actions threaten to encumber property being pledged as collateral and can seriously impact a debtor’s solvency.

In one example, lenders learned about a potentially large threat by accident. A large conglomerate was acquiring a privately-owned business. During the due diligence process, the business assured legal counsel that it had disclosed everything pertinent for the Litigation Section of the Disclosure Schedule to the Sale/Merger Agreement. However, during casual conversations that occurred as the deal was nearing its final stages, one of the executive officers told an anecdote about an employee who was injured while working on a piece of equipment. Upon further questioning, it was revealed that a suit was pending by the worker. Further, the worker was contemplating pursuing the case as a civil action outside of Workman’s Compensation, which would increase the potential liability.

Rather than hope for casual conversation to reveal information on legal actions, a court search should be conducted. Conducting a court search is reliable and inexpensive “insurance” to uncover the potentially significant risks of any legal actions your borrower may be involved in that could encumber assets. It can also shed light on the nature of the cases and the liability involved. Potential borrowers may indeed believe that they have disclosed everything they know regarding litigation. However, they may have overlooked a case or they simply may have thought that a matter was not important enough to mention.

When conducting court searches, it’s particularly important to include bankruptcy searches. Searches at the U.S. Bankruptcy Courts assist in the evaluation of a debtor’s credit risk. Like pending suits, bankruptcy cases cannot be revealed in the local filing office where liens reside. However, the inclusion of a borrower’s name as a petitioner in a bankruptcy proceeding is a clear red flag. If a company has filed for Chapter 11 bankruptcy, lenders will gain instructive insight into the borrower’s credit issues, whether they successfully executed their restructuring plan, and how creditors were repaid.

Bankruptcy searches—along with litigation searches—are pertinent for many types of lending agreements, from credit agreements to large merger deals. In transactions that involve asset sales, these searches identify whether the assets are controlled by the borrower as they claim they are, that no other secured parties can lay claim to the assets and that there is no pending litigation that could encumber the particular assets.

Check in tomorrow for part 5 in our advanced due diligence series: ordering a “search-to-reflect” after conducting a UCC filing.

Advanced due diligence series – #3: Include common name variations when searching for tax and other non-UCC liens

This third part in our advanced due diligence series will focus on the inclusion of common name variations when searching for non-UCC liens. Be sure to read the first and second posts in this series as well, on, respectively, the importance of filing under the correct debtor name, and on searching for tax and judgment liens.

Liens that are not governed by the UCC are not governed by the same due diligence rules, so it’s important to understand how to search for them. The now infamous case of In re: Spearing Tool And Manufacturing Co., Inc. (United States Court of Appeals For The Sixth Circuit) illustrates why.

In this case, the lender and debtor entered into agreements that granted the lender a security interest in all of the debtor’s assets. The lender perfected its security interest by filing financing statements, identifying the debtor as “Spearing Tool and Manufacturing Co.,” its precise name as registered with the Michigan Secretary of State’s office.

The debtor fell behind in its federal employment-tax payments, and the IRS filed two notices of federal tax lien against it with the Secretary of State. Both of these tax liens identified the debtor as “SPEARING TOOL & MFG. COMPANY INC.,” which varied from the precise Michigan-registered name by using an ampersand in place of “and,” by abbreviating “manufacturing,” and by spelling out “Company.” This was the name the debtor provided on some of its quarterly federal tax returns.

The lender periodically submitted lien search requests to the Michigan Secretary of State, using the debtor’s exact registered name. These searches never revealed the IRS liens, because the electronic search technology employed by Michigan disclosed only liens matching the precise name searched, not liens filed under slightly different or abbreviated names, as the IRS’s was. Unaware of the tax liens, the lender advanced more funds to the debtor.

After the debtor filed a Chapter 11 bankruptcy petition, the lender finally discovered the tax lien notices. The lender then filed a complaint to determine lien priority. The court held that federal law governed the matter, noting that a reasonable, diligent search by the lender would have disclosed the IRS tax liens and that the IRS had priority.

Although the ruling is limited to the facts of this case and to the Sixth Circuit, this case reinforces the importance of including tax lien searches in a complete due diligence plan—and searching for them in the proper manner, by including common name variations for example.

Check in Monday for part 4 in our advanced due diligence series: conducting court searches.

Advanced due diligence series – #2: Search for tax liens and judgment liens

This second part in our advanced due diligence series focuses on the non-consensual liens of tax liens and judgments liens. Be sure to read the first post in this series as well, on the importance of filing under the correct debtor name.

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.

Check in tomorrow for the third part in our advanced due diligence series: searching for common name variations.

Advanced due diligence series – #1: The importance of debtor name accuracy in UCC filings

We’re kicking off a new blog series on advanced due diligence strategies. Due diligence has always been a routine and essential part of the process of pursuing lending opportunities. However, in today’s volatile economic conditions, lenders are advised to take extra measures to protect themselves from losses. To get a more accurate picture of the borrower’s repayment potential and to ensure that any collateral related to the loan is secured, there are a number of steps that lenders can take beyond routine due diligence. These additional steps help reveal hidden threats such as tax liens, judgments, pending litigation and improperly indexed UCC financing statements. This 8-part blog series will focus on these and other measures that can help lenders avoid costly surprises.

TIP: Double check the accuracy of the debtor’s name when making UCC filings.

A UCC filing is only perfected if the filer gets the name right. The consequences of filing under the wrong name are illustrated in the case, In re: Tyringham Holdings, Inc. (United States Bankruptcy Court For The Eastern District of Virginia, Richmond Division).

The facts of the case were as follows. A secured party held a security interest in consigned inventory. The party attempted to perfect the interest by filing a financing statement with the Virginia State Corporation Commission. This financing statement listed the debtor’s name as “Tyringham Holdings.” The debtor was a Virginia corporation listed as “Tyringham Holdings, Inc.” on the public records of the Virginia State Corporation Commission.

The standard search logic of the Corporation Commission was such that an official UCC search certified by the State Corporation Commission revealed a search conducted under the name “Tyringham Holdings, Inc.,” but did not reveal the secured party’s financing statement under the name “Tyringham Holdings.”

Because the search using the correct name under the jurisdiction’s standard search logic did not disclose the financing statement, the court concluded that the financing statement was “seriously misleading.” The court ruled that the secured party’s security interest in the collateral was unperfected and the collateral could be sold free and clear of any lien held by the secured party.

As this case shows, it is important to determine the debtor’s correct name. One way to ensure that the correct name is being used is to conduct a Corporate Name Verification search, and to order copies of a company’s Articles of Incorporation and any Amendments thereto. (A similar step can be taken when the debtor is an LLC or other registered business organization). This additional due diligence measure will help eliminate the risk of any errors in accurately entering the debtor’s name in the filing, and help ensure the perfected status of a security interest.

Check back tomorrow for #2 in our advanced due diligence series: tax liens and judgment liens.

Revised matrix - State-by-state breakdown of new UCC Article 9 legislation

The last several months have seen a flurry of legislation, as more and more states introduce new amendments to Article 9 of the Uniform Commercial Code. Click here to download our latest state-by-state breakdown.

To view the status of each bill on the state legislature website, click on the hyperlink embedded in the Bill #. To get a better understanding of what is addressed in each section of the code, click on the hyperlinks in the code section titles in the matrix header row. (For example, clicking on "9-503: Name of Debtor and Secured Party" in the header row of the matrix will take you to a previous blog post which describes the difference between Alt A and Alt B).

We will periodically keep you updated as the legislation continues to change, so check back into the blog frequently.

*For more information about the various provisions of the model act, visit the “Legislation and Judgments” category of this blog.