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 corporations, limited liability companies or limited partnerships
Corporate Tax Lien Certificate
-Varies by state, but typically shows whether an entity has paid its corporate taxes to the Department of Revenue in the state where the entity is doing business
- Consider ordering on entities which are buying, selling or pledging collateral as unpaid taxes may result in a senior lien in favor of the state on the assets securing the loan
Uniform Commercial Code ("UCC") Search
- Shows whether or not personal property being pledged as collateral has already been pledged to a senior lien holder
- State UCC searches
-Order on individuals or entities that are buying, selling, or pledging personal property (most often in the form of business assets) as collateral
-Order in state where entity is incorporated or 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
- Order on borrowers, sellers and guarantors (if the guarantor's income is a source of repayment for the loan), in the county where the business is operating or where the individuals reside
Bankruptcy
- In this current economic climate, Lenders may wish to order bankruptcy searches on borrowers, sellers and guarantors to confirm that no parties in the transaction have filed bankruptcy
Pending Litigation Search
- Shows pending lawsuits which have been filed against an entity or individual
- If borrower is purchasing or redeeming the stock of a business, a lender should order a pending litigation search on the seller/company being purchased to ensure that the borrower does not assume any pending lawsuits
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, a search company can search the county records to confirm the title holders and lien holders of record
If a lender is obtaining title insurance on real property securing a loan, the title company should run county level searches on the current owner of the real property being insured and, if applicable, the buyer of the real property. In these situations, there is no need for a lender to order county UCC, tax lien, judgment or bankruptcy searches on the current owner of the insured property or the buyer of the insured property. If the county search results are not clear, the results will typically be shown as exceptions in the title report, but a lender should still confirm with the title company that they have run all applicable county level searches.
Another issue to be mindful of when ordering searches is timing (i.e. when to order the searches). It is often better to order searches sooner rather than later in order to deal with any issues that the searches may reveal. But a lender also needs to be careful that they do not order searches too early in the process as the searches could be considered stale after a few weeks or months. In order to prevent having to order updated searches which will result in increased costs to the borrower, lenders must be aware of the balancing act involved with the timing of search orders. While ordering searches is not a science, lenders can protect themselves and their borrowers and save their borrowers money at the same time by understanding the art.
For more information regarding closing and documenting loans, contact Katie at kobrien@starfieldsmith.com, or 215-542-7070.
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