Be Wary of a "Clean" Search Report
By: LYNN M. GARDIN
December 2003
Most commercial lenders will conduct a UCC lien search to determine if a prospective borrower has previously granted security interests to other creditors—often to see which liens need to be terminated, subordinated or lived with, and to assess the resultant collateral coverage.
Lenders are advised to proceed with caution if the search report reflects no filings.
Section 9-517 of Revised Article 9 states: “The failure of the filing office to index a record correctly does not affect the effectiveness of the filed record.” So, even if you have a clean search report, does it really mean that there are no filings against the prospective borrower’s property, or, quite possibly, does it mean that a filed statement was incorrectly indexed and yet is still effective to prime your anticipated lien?
The problem is, there is no way to know for sure. To become a bit more comfortable regarding the status of your anticipated collateral, there are a few things you can do:
- study the prospective borrower’s audited financial statements: is there any indication that there is any indebtedness for borrowed money? do the footnotes indicate whether it is secured?
- take a walk through the prospective borrower’s facility: notice any labels attached to the equipment or other assets indicating any other party’s interest?
- ask the prospective borrower how the business (including asset purchases) has been financed in the past.
Section 9-517 also highlights the need to conduct a post-filing search to be certain that your intended filing is of record. Although you would be able to rely on Section 9-517 for priority of your lien in the event of a mishap at the filing office, you most certainly will incur costs in proving that your filing complied with the filing requirements and was properly tendered for filing (along with the appropriate filing fee) and that you are therefore entitled to priority over a subsequently filed lien that is of record.
Bottom Line: Never trust a search report to prove the absence of liens, and always conduct a search to show your lien is accurately recorded.