When performing legal due diligence, one of the primary goals is to uncover hidden risks and liabilities, historical, pending, and future, that come with the deal.
However, your plan of attack can be dramatically influenced by several factors, including the type and size of the deal, the industry, time constraints, and more.
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Knowing what to look for can be challenging. Are you covering the right items? Could you be wasting time on non-relevant, low-priority areas? Or are you overlooking something important?
Balancing the amount of time and money spent on a transaction, while minimizing risks, can be a juggling act.
Here are some tips for optimizing your search strategy.
When determining what to search for answer these four questions:
Consider who your client is and how well you know the parties.
Are you working with a long-standing client of the firm? If so, you may already have valuable information about them. For new clients, expect to gather more details. If the debtor is a partnership, identify the partners. If it’s an LLC, determine who the members are and be prepared to perform due diligence on these parties.
Knowing what to look for can be tricky. A lender will want to know about liens and assets, but not all of them may be relevant. For example, a purchase money security interest (PMSI) may not have a bearing on the deal because this special type of lien only extends to purchase-money collateral. On the other hand, a bankruptcy trustee will be interested in all liens and assets to properly administer the bankruptcy estate.
Be sure to go beyond the parties’ representations, as they may be incomplete. For instance, if you come across a lien that has not been terminated, confirm with the secured party that the underlying obligation has been satisfied and, if so, request that a UCC-3 termination statement be filed.
The type of transaction will dictate your due diligence and lien search checklists. A cross-border deal, for example, may involve cross-border lien searches.
Certain industries will also determine due diligence best practices and the types of searches that need to be performed. An automotive deal will require DMV searches, while a technology deal may involve IP searches and filings. If the debtor was involved in environmental clean-up, EPA lien searches should be included. It is a good idea to consider a universe of different lien types and compare them against the factual background of your deal.
Depending on the type of deal, representations and warranties will also change. In secured loan transactions, borrowers are typically required to confirm that assets have not been pledged to anyone else, and that they will not change their name, move to another jurisdiction, or perform other actions that would impact the lender’s status without the lender’s prior written consent. Due diligence in these cases involves verifying the accuracy of these representations. This may involve periodic lien searches and/or confirming that the entity has not changed their name, relocated to another jurisdiction, or transferred your client’s collateral.
Finally, if obtaining personal guarantees, you may want to run individual lien searches and litigation searches on the guarantors.
The size of the transaction will determine the budget and amount of time spent on due diligence, with larger businesses and transactions typically requiring more investment.
As you establish the parameters of due diligence, consider budget constraints. Even large deals may have budget caps, and it is often up to the professionals and their clients to determine how much they are willing to spend on due diligence versus how much risk they are willing to tolerate.
Managing expectations is one of the most important due diligence considerations. Adequately managing costs and timing can help ensure that a closing goes smoothly.
Timelines are often dictated by business needs, tax implications, and availability of information, among other things. Several factors can impact closing dates. Legislative changes, for example, can add more steps or requirements that may delay your ability to deliver. If a transaction implicates cross-border searches, you need to factor in turnaround times in foreign jurisdictions. Sometimes even domestic turnaround times can be unpredictable, particularly if they are impacted by unforeseen events or disasters. These can mean government office closures and operational delays. Even expedited services may take days instead of hours.
It is paramount to work with a provider who can adequately provide time estimates, both domestically and abroad. Look for one who maintains constant communication with filing offices, so that you can best manage the timing of your client’s deal.
Ultimately, the scope of due diligence is a business decision that must be made by your clients. The more open you are about the scope, timing, and cost, the less chance there is for a client to allege negligence for failure to uncover a lien.
While firms and service providers across the country may group common searches differently, a deal typically includes the following standard due diligence searches:
UCC liens are governed by UCC Article 9, which applies to secured transactions. More specifically, UCC liens apply to consensual security interests, such as when a company takes out a loan and grants a lender a lien on all or some of its assets. Non-consensual liens, such as tax liens and judgment liens — where the debtor did not consent to the lien — are not covered by the UCC. The reason this is significant is because the UCC has specific rules concerning the debtor’s name and filing location, while non-consensual liens do not have to follow the same rules. As a result, the debtor name under which you search UCC liens and non-consensual liens, and the location where you search for them, may be different.
When searching for UCC liens it’s important to understand who or what the debtor is because the name and location rules are different for different debtors. For example:
Note that while all states have adopted the Uniform Commercial Code, despite its name, the state UCC laws do vary somewhat, as do the filing offices’ rules. Therefore, it’s also important to know the UCC law and rules of the states where you are searching.
Note on digital collateral:
A new section of the UCC code, Article 12, introduces the concept of controllable electronic records (CER). A CER is an electronic record that can be controlled. Examples include virtual currencies like Bitcoin and Ethereum, non-fungible tokens, and digital assets that have payment rights built in. However, assets that other commercial laws already cover, like electronic money, are not included. These new rules explain how people can own, transfer, and safeguard digital assets in business transactions.
Article 9 has been updated so that security interests in CERs, controllable accounts, and controllable payment intangibles can be perfected either by filing a financing statement or by obtaining control. If you perfect by control, it takes priority over filing, even if you gain control later. The updates also define “electronic money,” like government-issued digital currency. You can only perfect electronic money by obtaining control, unless it is in a deposit account, where normal deposit account rules apply.
The amendments also include choice-of-law provisions. Generally, the law of the jurisdiction where the CER is located applies. If the CER specifies its location, that law governs. If not, the law governing the system that records the CER applies. If neither is specified, Washington, D.C. law applies. For perfection by filing, the normal “debtor location” rule still applies, but only for perfection, not for priority.
(Note that although it is anticipated that all states will eventually adopt new Article 12 and the amendments to Article 9, as of August 2025, only 32 states had done so, with the effective dates of those amendments varying. Therefore, when searching for liens on digital assets make sure you are aware of the correct governing statute.)
Fixture filings fall under the UCC and thus largely follow UCC rules, but a few items are worth pointing out. A “filing on fixtures” involves filing a UCC-1 describing the fixture in the collateral description. These are filed at the state level following standard UCC rules described above. This is the method used when the fixture is still classified as personal property. However, when the fixture becomes attached or affixed to the real property, a “fixture filing” is made. In this case, the UCC-1 and UCC-1 Addendum forms are filed in the county filing office where the real property is located, which is where the search should be made. In some cases, a security interest in a fixture is perfected by recording a mortgage that covers the fixtures. This also requires a search in the county where the mortgage was recorded.
These non-consensual liens may have different naming protocols. The government may file a lien under a name different from the one required under the UCC and have superior rights.
Keep in mind that the IRS can file under a DBA or a name on the debtor’s tax return, and this name may not be revealed under a regular UCC search — although the IRS would still have priority. There are several cases that illustrate how courts side with the government in these situations. For example, in In re Spearing Tool and Manufacturing Co., Inc., 412 F.3d 653 (6th Cir. 2005), the IRS filed a federal tax lien against “Spearing Tool & Mfg. Company, Inc.”, which was not reflective of the debtor’s name on the “public organic record.” Yet the court found that the IRS still had priority over another secured party who had filed a UCC financing statement using the true legal name of the debtor, reasoning that “[a] requirement that the tax liens identify a taxpayer with absolute precision would be unduly burdensome to the government’s tax-collection efforts” and that burden is on the other creditors to perform “reasonable and diligent” searches.
Federal and state tax liens, and judgment liens can be found at the county or state level, or both, depending on the jurisdiction. Keep in mind that these liens do have expiration dates, which vary by lien type and jurisdiction. So, when reviewing lien search results, it’s a good idea to check whether a lien is still valid.
A bankruptcy case for business entities can be commenced in any federal district court in the debtor’s state of domicile (i.e., state of formation), where the debtor maintains its principal place of business, or where the debtor has its principal assets. For individuals, a bankruptcy case usually begins in the state where they live or where their assets are. It's a good idea to look for federal courts in these areas. Remember, bankruptcy courts operate under district courts, so while bankruptcy cases start in the bankruptcy courts, they can be appealed in the district courts.
When formulating your due diligence strategy, you may want to consider searching for pending litigation against the debtor and the guarantor(s), and potentially any other parties significant to the transaction, such as officers or members. It may be difficult to uncover every possible litigation but, typically, searches are done in the superior courts (or jurisdictional equivalent) where the entity has its principal place of business or chief executive office, as well as state and federal courts. If real estate is involved, search in the county where the real estate is located. In addition, you may want to consider running searches in criminal courts if individuals are involved.
Certain aspects of the deal (such as its size or the related industry) could lead you to take a deeper dive into less common lien types or hidden liens. These can include the following:
Considering other lien types allows you to expand the scope of the project from the beginning and prevents surprises down the road. You may discover an issue that your client hadn’t thought of that could affect the price of the company or cause post-closing problems. The more you can be aware of at the onset, the fewer problems you and your clients will encounter later.
These less common lien types and searches will not be part of every transaction. But it’s a useful checklist to have on hand when reviewing a deal to see if these types of searches could apply.
Tip: Many of these lien searches can be outsourced to vendors. For more information, read Uncovering the Hidden Liens That Can Affect Your Deal.
Here are a couple of other factors that could influence your searches.
Active cases, open court actions, and pending lawsuits can all threaten to encumber property that is pledged as collateral or can seriously impact a debtor’s solvency. Closed cases may reveal concerning information related to your debtor and/or guarantor(s), such as allegations of fraud. In addition, in some jurisdictions, judgment liens attach automatically to the debtor’s real property located in that jurisdiction. Your due diligence should, therefore, include a review of the litigation history of the company and any open or closed cases. Consider running litigation searches on the guarantors as well.
Listing the correct debtor name on a UCC search is critical. But for search purposes, it is advisable to run broad-based searches. As the party doing search due diligence, you want to uncover as many liens as possible — even against former names. Filing requirements are different. A financing statement (UCC-1) that does not list the debtor's name correctly could be considered “seriously misleading” and leave the creditor unsecured.
For more information, see Best Practices for UCC Searches and Filings.
Conclusion
Creating a strong lien search strategy is essential for effective legal checks. Start by setting clear goals and understanding the types of transactions involved, as well as the size and timeline of the deal. This approach helps uncover all potential liabilities. It’s important to conduct common searches like UCC liens, fixture filings, tax liens, and bankruptcy searches. Also, consider looking for less common lien types and performing thorough litigation searches to reduce risks. A solid due diligence strategy protects your client's interests and helps transactions run smoothly, reducing the chances of issues arising after closing.
For more information, contact a CT Corporation representative.
