What this is: If you are responsible for conducting public record due diligence searches, then your due diligence checklist includes UCC, state and federal tax liens, judgments and federal intellectual property searches or some combination thereof along with other important closing tasks. After all, these are standard practice in the M&A and financing domains and generally everyone knows what is needed for these types of transactions. Right?
What this means: Let’s take a step back and zero in on this public record due diligence requirement. Specifically, on one particular word that is often misused or about which assumptions are made. This assumption can have a less-than-optimum outcome on public record due diligence searches. That word? Judgment.
Judgments vs. Judgment Liens
Often, judgment and judgment lien are used interchangeably. Or, an assumption is made that when a judgment search is requested, results include judgment liens along with any judgments that may have been found. The key point to be made here is that there is a critical difference between a judgment and a judgment lien. The 2 terms are not interchangeable:
What is a Judgment?
The official decision of a court of law. It is a court’s decision granting or denying a plaintiff’s claim. Depending on the nature of the case, it could include an official determination of the amount due from a defendant to a plaintiff.
What is a Judgment Lien?
A judgment lien follows a judgment and is an encumbrance on property, real and/or personal, typically against the real estate of a judgment debtor.
Judgment liens are ordinarily created after a judgment is recorded in the local filing office (County Recorder, Recorder of Deeds, County Clerk, etc.) where the real property records are located, not in the court. It is true that a judgment can automatically become a judgment lien in some jurisdictions but in the large majority of states, a judgment lien does not occur automatically just because a judgment has been entered by the court. Some states are different from others in this regard.
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How Does This Affect Public Record Due Diligence Searching?
When a “judgment search” is requested, what is the end user expecting to uncover? A lien? A judge’s decision in a litigated matter? Open and/or closed litigation? The answers to these questions during the due diligence process need to align with the due diligence search request. The search request needs to distinguish between judgments and judgment liens and identify which jurisdictions the searches need to be conducted. Only then can end users involved with due diligence searching have confidence that their search results reflect the results that are needed.
Since a judgment is different from a judgment lien, searching only in either the court or the local real property filing office typically will not uncover everything needed for public record due diligence.
A court search (in the appropriate court(s)) for open and closed litigation will determine if there is a recently adjudicated matter that has or will result in a judgment, which then soon may become a judgment lien.
A local real property filing office search (where the real estate is located) determines if any judgment liens are attached to the property.
Court searches are necessary to uncover both judgments and pending litigation, but local real property filing office searches are necessary to uncover judgment liens in most situations/states.
Better Communication, Better Search Results
The next time a thorough public record due diligence search is needed, stop and confirm whether both court searches (for judgments and pending litigation) and local real property filing office searches (for judgment liens) are needed, and if so, that both are clearly requested. Without clarifying exactly what’s needed, you might end up missing critical public record information that is pertinent to your transaction.
Take this a step further for litigation searches and be sure to indicate if the search being conducted is on the defendant only, or if it should be conducted on both the plaintiff and the defendant. Is it valuable to the deal if the search results should include the party as plaintiff? Plaintiff results could indicate additional legal costs later and could be material to your transaction. Therefore, determining the records you are interested in uncovering and being sure they are being searched for in the proper jurisdiction is a comprehensive way to mitigate risks and surprises later.
So, from what we have seen, this is the best practice: Conduct due diligence searches for pending suits and judgments and request judgment liens in the state prescribed filing offices and court locations. Be sure to identify if the target entity should be searched as plaintiff, defendant or both in the courts.
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What kind of insights can financial filings provide in the public record due diligence process?
In the US, publicly listed companies are required to file financial reports with regulatory bodies like the Securities and Exchange Commission. Analyzing these filings (e.g., 10-K, 10-Q, 8-K or annual reports) can provide insights into a company's financial health, profitability, cash flow and liabilities. It also helps identify any significant financial risks or irregularities. Internationally, many countries require even private limited companies to file their financial statements with the corporate registry. To learn more, head on over to our article, International Due Diligence: Obtaining Corporate Information and Common Challenges.
When is a typical UCC/lien search not enough in the federal IP due diligence process?
Searching for UCCs that may include IP as collateral is necessary but limiting your due diligence to a typical UCC and statutory lien search may not be enough. A UCC may only provide a general collateral description, which may or may not indicate if IP is included because these specific details are only required in the security agreement. Read our article, Federal Intellectual Property Due Diligence: Beyond UCC and Lien Searches.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
