CT Lien Solutions Blog

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.

March jurisdictional holidays

Set forth below is the State Holiday List for the month of March 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
VT	Town Meeting Day	March 6
HI	Kuhio Day	March 26
AK	Seward’s Day	March 26

February jurisdictional holidays

Set forth below is the State Holiday List for the month of February 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, IL, MO	Lincoln’s Birthday	February 13
AL (also Thomas Jefferson's birthday), AR (also Daisy Gatson Bates Day), CT, DC, IL, MA, MS, MO, NY, VA	Presidents' Day (In MT, Lincoln and Washington's Birthday; in UT, Washington and Lincoln Day)	February 20
AL (Baldwin and Mobile Counties only), LA	Mardi Gras	February 21

‘Debtor name’ again – Surprising new court decision illustrates value of 2013 Article 9 amendments

If you’ve been following our blog over the past year, you’ve read a lot about the new amendments to the Article 9 that states are currently adopting. A recent court decision involving what constitutes a legal individual debtor name seems to illustrate why so many states are opting to provide more clarity by revising the language of Section 9-503 of the Uniform Commercial Code (UCC).

Contributed by Tim Hall, Director of Government Relations, CT Corporation

In Re Ben Miller and Debbie Ann Miller, Bankruptcy Case No. 10-92570, USBC – Central Dist. of Illinois (decided January 6, 2012)

Facts: State Bank of Arthur (SP) began a banking relationship with Bennie A. Miller and Debbie A. Miller (debtors) in 1995. When they opened personal bank accounts, the signature card was filled out and signed by the Millers as “Bennie A. Miller” and “Debbie A. Miller”. The relationship continued for many years, and various promissory notes and security agreements were signed by Mr. Miller using the name “Bennie A. Miller”. In January 1999, SP filed a blanket UCC financing statement identifying the debtors as “Bennie A. Miller” and “Debbie A. Miller”. In addition, the financing statement listed the Miller’s business trade name “d/b/a Power Plus”. The financing statement was timely continued in 2003 and 2008. In December 2010, the debtors filed for bankruptcy.

On June 17, 2011, the debtors filed an adversary proceeding to avoid the lien of the bank to the extent the financing statements incorrectly identified the legal name of Mr. Miller as “Bennie A. Miller”. There is no dispute the financing statement correctly identifies Mrs. Miller as “Debbie A. Miller”.

During trial, the following testimony and evidence was presented:

1. Mr. Miller testified that he has gone by the name of “Bennie Miller” for much of his life, and that is how he is generally known in the community.
2. Mr. Miller’s unexpired driver’s license and his Social Security card both list his name as “Bennie A. Miller”
3. Mr. Miller’s name is listed as “Bennie A. Miller” on the deed to the Miller’s residence, his Federal Income Tax returns, his credit card accounts and the bill of sale from the purchase of their business.

However, Mr. Miller’s Indiana birth certificate lists his name as “Ben Miller”. The parties agree that a UCC lien search conducted against the debtor name “Ben Miller”, using the Illinois Secretary of State’s standard search logic, does not disclose the bank’s financing statement listing the debtor name “Bennie A. Miller”.

Issue: It is the plaintiff’s position that, as a result of failing to use the debtor’s legal name of “Ben Miller”, the UCC-1 financing statement and continuations filed by the SP are insufficient to perfect the SP’s security interest in non-titled collateral owned by the debtors. There is no dispute that a UCC lien search for the debtor name “Debbie Miller” does disclose the SP’s financing statement, and the SP is therefore secured as to at least half of the assets in question.

Decision: Under the undisputed facts of this case, the Court finds that Mr. Miller’s legal name as indicated on his birth certificate is in fact “Ben Miller”. The evidence does not support the SP’s position that Mr. Miller has legally changed his name to “Bennie Miller”.

While the court recognizes that various states have amended the Uniform Commercial Code to address the situation presented here, those amendments have not been adopted in Illinois. Under the current status of the Illinois Uniform Commercial Code, this court must find that the SP’s use of the name “Bennie A. Miller” on its financing statement was “seriously misleading”.

How 2013 amendments to the UCC Article 9 would protect lenders in future similar scenarios

As you may be aware from previous blog posts, some states have recently adopted, and other states are now or will soon be considering, an amendment to Section 9-503 of the UCC that would provide more specific guidelines for secured parties. States have the option of choosing between “Alternative A” or “Alternative B” (or may choose to make no changes to this section of the state’s code).

“Alternative A,” or the “Only If” option, is stricter for filers, but more clear cut: if the debtor has a valid driver’s license in the state of filing, the secured party must file on the name contained on that license. This also makes the job of searches in these states much easier. If Illinois had this law in place at the time of the above decision, the SP’s filing would have been deemed to be under the correct and legal name. Use of the name “Bennie A. Miller” would not have been seriously misleading because the filing would have been uncovered by an appropriate search according to the jurisdictional law and search conventions.

“Alternative B” or the “Safe Harbor” approach is more lenient for the secured party, in that it may file on the name contained on the driver’s license, but it also allows for other individual names to be used, such as the surname and first personal name. Because a variety of names will be sufficient under this law, a searcher must conduct a more expansive search to ensure that all name variations are covered, but the filer is protected for a greater array of names. If Illinois had this law in place at the time of the above decision, it still would have been protected for using the name “Bennie A. Miller” as this would have been one of the names protected by law.

Federal tax lien series #3 – The fight against federal tax liens: Developing a search strategy

If you’ve read our previous posts in this series, you’re probably convinced that you should have some sort of strategy for keeping aware of federal tax liens that get placed on clients in your portfolio—but what? In this post, we provide a few “best practice” tips.

Currency is king

You already have a ticking clock over your head once a federal tax lien is filed on one of your clients. Don’t speed up the clock by relying on data that lags behind the times. Information culled from online databases is inexpensive, but you get what you pay for. It’s not current. In fact, it often lags months behind real-time data. By the time you find evidence of a lien filing, you have likely already issued credit that will be second in priority to the IRS.

Instead, get your data straight from the source. Hire a service provider to do manual searches at the state and county level, which means sending someone physically to the clerk’s office. This is the surest and most effective method of detecting federal tax and other liens quickly and effectively. With this kind of data currency, if there’s a tax lien, you’ll find it in time to act.

State or county?

There are a number of jurisdictions that require federal tax liens to be filed only at the county—not state—level. So, in these jurisdictions, if the database or service provider you are using is relying on state data, then you will never find that lien at all. For this reason, county data is an imperative.

How often to search?

The next question is how frequently you should be searching. The answer really depends on your comfort with risk, but decisions can be made on a deal-by-deal basis, based on the value of the deal or the risk profile of the borrower. If you want the most comprehensive protection, you should perform state and county-level manual searches every 30 days. If you decide a particular deal is lower risk, you may want to search every 60 days, or quarterly.

The bottom line

We recommend that you conduct what is known as “recurring searches” at the state and county level. This recurring due diligence will be essential to protecting your interests throughout the lives of your loans; you’ll be alerted with immediacy to events such as federal tax liens that can threaten your portfolio, so you can take appropriate action to protect yourself. You decide how frequently you want to search, on a deal-by-deal basis. A service provider can help you perform the searches, and some service providers, such as CT Lien Solutions, manage the process and the results. For more information on the benefits of conducting recurring due diligence with CT Lien Solutions with our innovative new technology and trusted service teams, click here.

Federal tax lien series #2 – In depth: 45-day rule for federal tax liens

In the last post we discussed why you should care about staying alerted to federal tax liens, and we mentioned the 45-day time limit lenders are faced with in the unlucky (but somewhat likely) instance of the IRS placing a federal tax lien on one of your clients. You’ve probably heard of the 45-day rule before—but how well do you understand it? Let’s look at an example scenario.

The Internal Revenue Code (IRC) provides for certain situations in which a lender may retain priority over a federal tax lien, where the federal tax lien was filed after the lender entered into a security agreement with the borrower. Can you recognize which of the four loans described below allow for the lender to retain first position over the IRS?

Facts

• ABC Factor enters into a security agreement with XYZ Retailer, with the debtor’s accounts receivable secured as collateral. The UCC is filed on January 15, 2012. ABC makes a loan of $15,000 on that date.
• The IRS files a federal tax lien on XYZ Retailer on February 6, 2012.
• On March 3, 2012, ABC Factor makes a loan of $5,000 to XYZ Retailer. ABC has no knowledge on this date of the aforementioned federal tax lien.
• On March 4, 2012, ABC Factor learns of the federal tax lien.
• On March 5, 2012, ABC Factor loans XYZ Retailer $2,000.
• On May 31, 2012, ABC Factor loans XYZ Retailer $1,000.

So, quiz time. Who has priority on a) the $15k loan; b) the $5k loan; c) the $2k loan; and d) the $1k loan? Answers below:

• The loan made on January 15, 2012 for $15,000 has priority over the federal tax lien. The agreement was entered into and the loan was made before the federal tax lien was filed.
• The loan made on March 3, 2012 for $5,000 has priority over the federal tax lien. It is in compliance with the IRC Section 6323(c)(2) because lender and borrower entered into the loan in the ordinary course of businesses; the agreement was entered into before the federal tax lien was filed; at the time of the loan, the lender had not received knowledge of the existence of the federal tax lien; and the loan was made within 45 days of the filing of the federal tax lien.
• The federal tax lien has priority over the loan made on March 5, 2012 for $2,000, because the bank had actual knowledge of the existence of the federal tax lien at the time it made the loan. Because of this knowledge, the 45-day time limit does not apply. ABC should not have extended credit to XYZ after learning of existence of the federal tax lien.
• The federal tax lien has priority over the loan made on May 31, 2012 for $1,000, because the bank had actual knowledge of the existence of the federal tax lien, and the loan was made after the 45th day of the filing of the federal tax lien.

Note also (and this is important!) that in the above scenario, if ABC Factor never learned of the existence of the federal tax lien, any loans made to XYZ after the 45th day following the federal tax lien would still have been second in priority to the IRS. As we mentioned in our previous post, the onus is on the lender to be aware of federal tax liens, whatever it takes.

So what does it take to stay aware? Read on.

Implications to due diligence best practices

It is recommended that you search for federal tax liens before issuing any new credit (including new loans in revolving lines of credit) to any borrower, especially those of high-risk. Practically speaking, this is often best achieved by setting a recurring search schedule of, for example, every 30 or 60 days.

Because lenders must discontinue all new funding immediately upon becoming aware of the federal tax lien, you’ll want to use a carefully managed process for conducting these searches and reviewing their findings. Choose a service provider such as CT Lien Solutions that provides you with clear, concise search results that direct your attention precisely and with immediacy to the presence of any existing federal tax liens, so that you can take immediate action.

For more tips on developing a trusted recurring due diligence strategy, read the final post in this series tomorrow.

Federal tax lien series #1 – Factors and ABLs: Why you need to stay aware of federal tax liens!

So, you’ve done your initial due diligence and approved a client for a revolving line of credit secured by assets such as inventory or accounts receivables. You file a UCC and begin extending loans, and everything seems to be going smoothly, until you get wind of the infamous “f” word…federal tax lien, filed on your client! If you’re hearing about this as a result of routine, recurring due diligence, chances are you’re in an excellent position to mitigate your risk. If you’re not searching for federal tax liens routinely, your lien position and ability to recoup your investment may already be lost.

Why should you be concerned about federal tax liens? The short answer is because they may take priority over loans made in revolving lines of credit, and you ultimately may not be able to recover your investment. Let’s begin to examine why and how.

First, consider that you are issuing revolving lines of credits to your clients over a period of time—and, these clients are typically high-risk borrowers. They’ve checked out in the initial due diligence phase, but what about events that may happen during the life of the loan? Specifically, how confident are you that a client is paying its federal taxes on time? Should the IRS file a federal tax lien against your client (we’re assuming you already have a perfected UCC filing on the record), you have only 45 days from the date of this IRS filing (or until the date you become aware of the federal tax lien, the earlier of the two—more on this in tomorrow’s post) to take appropriate action to protect yourself, including halting any new extensions of credit. The onus is on you to find out that the tax lien was filed. My guess is your client is not going to tell you, and the IRS is notoriously remiss in notifying lenders (as appointees of the 8821 form) that a lien was filed.

But let me give the IRS the benefit of the doubt (hey, it’s almost tax season…I don’t want any bad blood between us); let’s assume they do provide notice. Have you received it in time? If you have extended any credit to your client beyond the 45th day after the federal tax lien was filed, it is second in priority to the IRS. Should the matter go to collections, the IRS will be entitled to claim its share of the pie first, and you’ll be left hoping for any crumbs left over.

The 45-day rule is a little more complicated then this, and bears further examination. We’ll cover it in more detail tomorrow.

Then, on Thursday, we’ll explore best practices for developing a due diligence strategy that will maximize your protection against risk from federal tax liens and other threats. Because of the uncertainty of receiving notice of federal tax liens from your clients or from the IRS, it is always best to develop a strategy to proactively search for federal tax liens, so you’re not left guessing whether they might exist.

January jurisdictional holidays

Set forth below is the State Holiday List for the month of January 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
AL, AK, AZ, AR, CA, CO, CT, DE, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NY, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX [Comptroller only; SOS is open], UT, VT, VA, WA, WV, Wi, WY	New Year’s Day (observed)	January 2
VA	Lee Jackson Day	January 13
ALL	Martin Luther King, Jr.'s Birthday* (* In AL and MS, also Robert E. Lee's Birthday; in ID, also Idaho Human Rights Day; in WY, also WY Equality Day)	January 16