Three Phases of Due Diligence Series – Phase One: Pre-FundingUCC, Corporate, Due Diligence, Revised Article 9
In the pre-funding phase, lenders perform public records searches to uncover any existing liens or outstanding financial obligations that bind their prospect. Searching helps lenders determine if they could obtain a priority position to collect if they decide to fund the deal. Companies who require additional intelligence and insight in corporate due diligence may wish to hire investigators to assist with the process.
Focusing on the “Who, What and Where” of searching is a great way to be certain your search effort is comprehensive.
Who to Search
The first step is to determine what party names to search. You will want to take a moment to compile a list of all of the names and variations of those names under which liens could be filed.
Here are a few pointers to get you on the right track:
- Check corporate records to determine the legal name before performing searches on a business.
- Utilize online search systems that allow for broad-based name searching to reveal name variations.
- Watch out for jurisdictions that use Revised Article 9 (exact name) search logic. Searches performed in these jurisdictions will not include any similar names.
What to Search
The types of searches you perform to evaluate a prospective borrower will likely be based on a variety of factors including your relationship with the applicant, credit reporting information, the amount of the loan and your organization’s internal policies and procedures.
The following represents a common pre-funding due diligence search package:
- UCCs (and available tax liens or judgments) at the state level
- UCCs/fixture filings, tax liens and judgments at the county level
- Civil litigation at the State Court of General Jurisdiction
- Civil litigation at the U.S. District Court
- Bankruptcy at the U.S. Bankruptcy Court
Where to Search
Every public record has a specific place where it should be filed, based on the type of record and statue in that specific jurisdiction. Searches must be performed at the appropriate filing office to ensure reliable results.
Here are some tips to help determine where to search:
- UCCs on a Business Name – State of organization (domicile state)
- UCCs on an Individual’s Name – State of primary residence
- Fixture Filings – County where the collateral is located
- Tax Liens – Depending on the jurisdiction, they could be filed with the state, county or both. Keep in mind that filing offices often maintain tax lien records on a separate index from their UCC or Fixture Filing records.
Check back next week for another installment of The Three Phases of Due Diligence!