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CT Expert Insights: Performing UCC Search Due Diligence

Uncovering the Liens That Can Affect Your Deal

Due diligence is significant when performing Uniform Commercial Code (UCC) searches. Even the simplest UCC searches and filings require strong attention to detail. Whether you’re conducting a single search or a more complex due diligence strategy, it’s crucial the search and filing results are clear, comprehensive, and accurate. 

Listen to Bill Moore, Senior Manager of Transactional Business Consultants and Law Firms Sales for CT, as he offers tips for navigating the due diligence process and protecting your security interests. Topics covered include best practices for conducting a UCC search, how to identify pending litigation against a debtor, checks, and balances that will ensure the deal isn’t derailed, and more.

 

 

TRANSCRIPT

Greg: Hi, I’m Greg Corombos. Our guest this week is Bill Moore, Senior Manager of Transactional Business Consultants and Law Firm Sales for CT Corporation. Today we’re going to be talking about the sometimes intimidating topic of secured transaction law, as well as due diligence on some of those key topics. Bill is here to help us understand the concepts a whole lot better. Bill, thanks so much for being with us today.

Bill: Thanks for having me, Greg.

Greg: Businesses often use Uniform Code Commercial [UCC] filings to protect themselves during significant transactions, but any mistakes can have big consequences. So, what are some tips for what is known as due diligence in ensuring your security interests?

Bill: A lot can be done in the interest of due diligence. It’s really important that secured lenders and counsels representing clients and banks take a strong search methodology and a strong due diligence path to uncover certain lien types that are pertinent to their deal or can throw or derail their deal. Some of the due diligence tips are searching in the right jurisdictions under the right legal name. It’s very important to search the debtor name and to get it correct. It’s also important to go to the right jurisdictions. Typically, counsel will search at the central filing office, which is the Secretary of State type office, and they’ll look for certain types of liens. But often that will include additional searches at the local and county level, and then looking for hidden liens that may impact their deal as well.

Greg: And if you find those things, how do make sure there isn’t an additional risk as a result of that.

Bill: It really depends on the size of the deal. It depends on the industry you’re working in. So, there might be reasons for taking a deeper dive. There are liens out there like hospital liens, or mechanic's liens if you’re dealing with a construction deal. There could be ERISA or Environmental Protection Agency (EPA) liens that are part of a transaction that could derail you as well.

Finding all of those would have certain consequences. Most importantly is looking for other liens outside of just UCC Article 9, like federal and state tax liens, and judgment liens. Those liens can actually trump a UCC financing statement, and when found, counsel needs to sort it out and deal with how much money is involved, who is going to pay that off or remedy it or make the hard decision if this is a financing deal, this particular debtor may not be funded.

Greg: When you talk about deep dives, and making sure you know all the liens that are out there, is there a fairly limited number of places that you will find these things and where they’re filed, or could this be in a wide variety of places.

Bill: Generally, the code has done a good job of indicating where you need to file. I mentioned there’s a central filing office in each state, but also the county level where liens are located--your UCC fixture filings and regular UCC liens, in addition to federal and state tax and judgment liens. But there are thousands of counties out there that can be searched. So understanding the code and why you need to search at that level is paramount.

In addition to those lien types, I strongly recommend that a searcher, be it lender’s counsel or any counsel, should also look for litigation, pending litigation. Basically, pending litigation is a judgment lien in waiting. Outside of lien law itself, there may be a case or cases out there, where your debtor is actually a defendant. And if the court lays down a decree and says you owe X amount of money, that basically has not been walked across the street and into the recorder’s office as a judgment, yet would impact or could impact the solvency of a particular debtor who’s in the deal. So then trying to understand, do I go to the federal courts or to the state courts, and after the state courts which civil court, is pertinent here.

So really, relying on strong service providers and competent counsel to navigate those waters is going to be paramount to the deal.

Greg: Do you also have to spend some time navigating the strength of the case against them? Or is it a pause button when you run into pending litigation? How do you evaluate that?

Bill: That’s a great counsel, and so that goes back to counsel making a legal opinion. Typically what we would grab is a docket to tell you what’s happening in the case, the complaint to say what they’re asking for or what was breached. And finally, if there has been a recent decree or some type of ruling, that, too, will be pulled. So all of that has to be reviewed. It could be a minimal amount of money. It may not affect the assets that are up in question or being secured at the time. But generally speaking, counsel is going to want to know about that because it could be severe in terms of ramifications, depending if the debtor is now a defendant and has lost that case.

Greg: We’ve talked a lot about due diligence and doing things the right way. Let’s talk about what can happen if you don’t. Talk a little bit about loss of priority and how courts, especially recently, have been dealing with that. What are some of the biggest takeaways you’ve seen?

Bill: There’s been some interesting case law over the years. Most recently, there’s been the GM case; it’s been talked about a lot. And within that case, briefly, is an adversary proceeding where an unsecured creditor committee asked the courts to determine whether or not a 1.5 billion dollar UCC lien was now not perfected and should be part of the unsecured creditor’s bucket. An administrative agent of GM had the authority to file the termination statement and authorized it. Unfortunately, it was not their intent to file that lien. They were trying to terminate a syndicated lease agreement that GM had already paid off. Unfortunately, he authorized, or they authorized, the termination of a syndicated term loan for 1.5 billion dollars. The case here centered around, even though the administrative agent didn’t have the intent to file against that 1.5 billion dollar lien--had nothing to do with that particular deal--they still did it. And because they had the authority to do it, it held up in court. So you could imagine the loss of 1.5 billion dollars across secured lenders, rippled across the industry.

The takeaway and the lesson here is pretty simple. You really need to have a sound methodology as to how you’re going to create your termination filings, making sure you double and triple check the search results that come back when you’re doing your due diligence. I highly discourage counsel to send a list of UCC-1 financing statements to an outside, third-party vendor or somebody else who may not have a vested interest, and say create the terminations and file.

So really doing a thorough review, double checking, writing out those terminations or electronically filing them, and having some type of checks and balances in place to make sure you’re not erroneously filing, because once you have the authority to, the intent may not matter.

There are other cases, Greg, that centered around the debtor name, that seems to be the most important. There’s a case out of Utah going back a few years--and other jurisdictions as well--that centered around the debtor name where punctuation and spacing mattered within the name. If the name was C.W. Mining, or whatever the name might be, if that is how it is listed on the organic documents, the formation documents, or the Articles of Incorporation--that’s the name that should be lifted and put on the document. Because punctuation was missing and the spacing was out there, the court said that “When you search for that document, using the search logic of that particular state, and the filing wasn’t found, it’s to your detriment, filer, that it wasn’t found.”

Punctuation and spacing shouldn’t matter, and it doesn’t matter in a lot of jurisdictions, but in a few states it did, and it still does. So, coming down to really understanding the true legal name of the debtor is going to be very important.

There’s also outside of registered entities, Greg, filing under an individual name. Certain states now can adopt either Alternative A or an Alternative B state. And really within some of those alternatives, the crux is looking at the driver’s license or state ID to determine the true legal name. What we saw happening over time, and still sometimes today, unfortunately, people are filing under a “formerly known as” or maybe a maiden name. Or, for example, Bill or William, Maggie for Margaret, Bob for Robert. And people may interact daily and have checking accounts under certain names. But really it comes back to what it say on the driver’s license, on the most current state ID, and using that name specifically.

Finally, a lesson there is, when in doubt, if you’re not sure if it’s William A Moore III or Bill Moore or William Moore or William A Moore, you can file against multiple debtor names. Adding those debtor names to an attachment is pretty cheap insurance for a filer. May cost you a couple extra dollars to put that attachment on the public record, but at least you can sleep at night knowing that if a searcher went and looked for that document to get notice of that type of deal under any variation name, they might find it.

Greg: Wow. Good to have some flexibility there, but obviously details matter greatly when we’re talking issues like this. So in our last couple minutes, Bill, let’s get a scope of how the business community is doing on this front as well as the lenders. How well do the businesses and lenders have a grasp on how to proceed in these situations, and maybe if you have an example of how doing things right paid off or doing it wrong has blown up in folks’ faces.

Bill: The Model Act is pretty straight forward. The drafters of the code did a great job at saying, “This is how you need to perfect your security interest when you’re filing.” The problem we see is that with so much happening in a major deal--and it could be a merger acquisition or a syndicate loan or mezzanine level funding--there’s so many spokes in that wheel, that often times the simple filing itself is taken for granted, and it may be passed over to a junior paralegal or someone who’s not well-versed, and it’s often overlooked without a strong checks-and-balance. Many big firms have learned their lessons, and they stay on top of the case law

The takeaway is to not take this simplistic form for granted because the courts are going to be very strict. They’re saying, “We’ve given you ample opportunity to get the debtor name right, there are ways to find the true legal name, the collateral description basically needs to be an indication of the collateral.” But remember the financing statement itself is basically a snapshot of the security agreement behind the scenes, so getting that debtor name correct, a good indication of the collateral, and making sure the secured party information on there, will be very important. The communities today are concerned about some of the more trickier nuances. If, for example, you filing against a trust or trustee under Article 9, there could be 13 variations on how to file against that trust or trustee. It might depend on whether it’s a registered trust, who the trustees are, who the beneficiaries are, what settlers are involved, what addresses are involved, and all those combinations can add up to some complexities that you need to navigate. Service providers like ourselves who do this day in and day out work with big law firms, medium law firms, and lenders to make sure we navigate those waters for them and help them in some capacity. But generally, it’s going to come back to the legal opinion of outside counsel, or even inside counsel, to get that right and not take the simplicity of the form for granted.

Greg: Bill, I’m glad you mentioned the fact that CT can provide valuable services. That’s what you do and others in your business do to help folks navigate this because there’s a lot of business owners who are experts on a lot of aspects of their business, but maybe not this. So, it’s good to have outside help. Certainly, the legal aspect, as you mentioned, but also from professionals like you. So thank you very much for helping us understand it better as we had this discussion today.

Bill: Thank you. I appreciate it.

Greg: Bill Moore is Senior Manager of Transactional Business Consultants and Law Firm Sales for CT Corporation.

 

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