Lenders who have liens on inventory or accounts receivable know to watch troubled credits closely for possible tax lien filings. However, many of these same lenders do not realize that, under Revised Article 9, lien searches have new built-in pitfalls! This alert will highlight issues lenders should be aware of as they monitor tax lien filings.
- As you are aware, Revised Article 9 simplifies filing location decisions and therefore should also make it easier to search for existing liens. Attention is now directed to the state where the entity is "domiciled." However, until 2006, lenders should look for tax filings not only in the domicile but also in all the locations that were appropriate before the Revision. Searches should include the borrower’s principal place of business and where inventory is located.
- Searches of the domicile state for UCC filings will not necessarily pick up all tax liens. The IRS often files its liens based on the name and address on the tax return - not necessarily where the business entity is domiciled - and does not necessarily use the taxpayer’s official legal name. The only way to know for sure that you have searched all proper places for tax liens is to search where the old and new UCC requires filing, and get the tax return and search under the name and in the location listed on the tax return.
- Revised Article 9 requires that the name on the UCC filing must be the correct legal name of the entity. The latitude that some courts allowed under the old law is gone. Therefore, reliance on a computer database - even at a Secretary of State’s website - can be dangerous when you are completing UCC Financing Statements. There may be keying errors in old UCC filings if you take your information from the website, or the particular filing office may allow for filing under a trade name. To determine the correct legal name of the debtor, obtain copies of corporate formation documents and any amendments to these, and copy the name exactly.
- Once your UCC is filed, monitor it to ensure it is and remains correct. Monitor the debtor for any name change. The UCC places the burden to monitor and, if necessary, amend, on the secured creditor. Monitor the debtor for any change of home state by a filing to redomicile which would change the business entity’s domestic state. This could result in a loss of perfected status when the domicile is changed.
New Bankruptcy Rules Impact Lenders
On December 1, 2003, new Bankruptcy rules took effect that may affect you:
Social Security Numbers
In a change designed to protect individual privacy and prevent identity theft, now only the last four digits of an individual debtor’s Social Security number must be included in "the title of the case," which appears on the petition and all other documents filed with the Bankruptcy Court. The debtor still provides the Clerk of Court with his or her full Social Security number at the beginning of the case, but the full number will not be made available to the general public. To assist creditors in proper identification of the debtor, creditors will receive the full Social Security number on their copy of the 341 meeting of creditors notice, as well as a list of all other names used by the debtor during the six years prior to the filing of the case. Business debtors still are required to provide taxpayer identification numbers (EINs) in full because these numbers do not implicate individual privacy.
Corporate Ownership Statement
Another change is designed to give Bankruptcy Judges information needed to spot conflicts of interest that would require their withdrawal or recusal from a particular case. Now corporate debtors as well as all corporations who are parties to bankruptcy litigation matters (such as preference actions and objections to discharge) must file a corporate disclosure statement identifying any corporation that directly or indirectly owns 10% or more of any class of the corporation’s equity interests. The new rule also requires parties to file supplemental statements promptly whenever changed circumstances require disclosure of new or additional information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.