Failure to perfect and maintain liens in the proper lien position against collateral is consistently one of the top reasons for repairs of the SBA Guaranty. Therefore, an important part of a lender’s due diligence is ordering searches on borrowers, guarantors and sellers to make sure the collateral securing the loan is not encumbered (or is encumbered only by those liens the lender was expecting) and that no judgments, tax liens or lawsuits are filed against the parties to the transaction. Lenders can protect themselves and their borrowers and cut down on unnecessary costs by understanding which searches are required depending on the type of transaction and the specifics of the deal. Below is an explanation of some of the more common searches that lenders may want to consider ordering.
Certificate of Good Standing
- Certificate from a Secretary of State which shows that an entity is active and/or in good standing to transact business in the state where the entity is formed or the state where the entity is doing business
- Order on borrowers, guarantors and sellers if these parties are registered entities such as corporations, limited liability companies or limited partnerships
- Order in the state where the entity is formed and the state where the entity is doing business, if different
Corporate Tax Lien Certificate
- Varies by state, but typically shows whether an entity has paid its corporate taxes to the taxing authority in the state where the entity is doing business
- Consider ordering on entities which are selling a business as unpaid taxes may result in successor liability for the buyer/borrower in favor of the state
- Order in the state where the entity pays taxes
Uniform Commercial Code (“UCC”) Search
- Shows whether or not personal property being pledged as collateral has already been pledged to another creditor to secure indebtedness
- State UCC searches – order on individuals or entities that are buying, selling, or pledging personal property as collateral; order in state where entity is organized/incorporated or where the individual is a resident
- County UCC searches – order on individuals or entities that are buying, selling, or pledging personal property which is affixed to the real estate (i.e. fixtures); order in county where the fixtures are located
Tax Lien and Judgment Search
- Shows all tax liens or judgments which have been filed against an entity or individual
- Consider ordering on borrowers, sellers and guarantors (particularly if the guarantor’s income is a source of repayment for the loan)
- Order in the state and county where the business is operating or where the individual resides
Bankruptcy
- Consider ordering bankruptcy searches on borrowers, sellers and guarantors to confirm that no parties in the transaction have filed bankruptcy
- Order in county where the business is operating or where the individual resides
Pending Litigation Search
- Shows pending lawsuits which have been filed against an entity or individual, but have not yet resulted in a judgment or dismissal
- Consider ordering pending litigation searches on borrowers and sellers. A pending litigation search is particularly important in stock purchase transactions to ensure that the borrower does not assume any lawsuits as part of the sale.
- Order in county where the business is operating
Owner and Encumbrance Search (i.e. Property Search or Title Search)
- If a loan is secured by real property, but there is not enough equity in the property to warrant the cost of title insurance, lender should obtain a search of the county records to confirm the title holders and lien holders of record
Keep in mind, if a lender is obtaining title insurance on real property securing a loan, the title work will likely include county level searches on the current owner of the real property being insured and, if applicable, the buyer of the real property, which may impact which searches a lender orders.
There is no one size fits all search order, but Lenders can protect themselves and their borrowers by understanding which searches are necessary depending on the specifics of the deal. For questions regarding searches or other closing and documentation matters, contact the attorneys at Starfield & Smith at 215-542-7070 or email us at info@starfieldsmith.com.
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