Uncovering the hidden liens that can affect your deal

A hidden lien is a lien that is not recorded in the public records. This can happen for a number of reasons, such as:

• The lienholder failed to file the lien properly
• The lien was filed in the wrong place
• The lien was filed under a different name than the property owner.

Hidden liens can delay or terminate a transaction and should be carefully considered during the due diligence process. Therefore, it is critical that legal counsel adopt a vigorous search methodology to uncover certain lien types that are pertinent to the deal.

Judgment liens

A judgment lien is a type of non-consensual lien (a lien that attaches to a property without the owner’s agreement). It’s created when someone wins a lawsuit against the property owner and then records the judgment against an asset such as a house, land, bank account, or other personal assets.

Note: Non-consensual liens do not follow UCC rules regarding “organic public record” for debtor name. Therefore, trade names, old names, and even nicknames can be used, and liens are enforceable.

Almost any legal scenario can be converted into a judgment lien. Some examples include the following:

• Unsecured creditor (credit card) pursues a judgment
• Tort (slip and fall, sues and wins)
• Former employee sues and wins
• Disputes between owners

Did you know?

Depending on the jurisdiction, most judgments liens can attach to after-acquired property. Judgment liens have a shelf life (typically 7-10 years) but varies by state. However, unlike a mechanic lien, a judgment lien can be continued indefinitely in most states—like a UCC filing.

While most prior-filed UCC 1 will prevail over judgments, some ambiguity exists in “factoring” cases where a secured party gets a judgment notice from a third party. For example, California code has a 45-day notice rule.

ERISA liens

Enacted by the Employee Retirement Income Security Act of 1974, ERISA is a federal law that governs retirement, health, life, and disability benefits for Americans. It was created to protect the employee and their funds that were contributed to covered plans via payroll deductions. ERISA sets minimum standards for most voluntarily established pension and health plans in the private industry to provide protection for individuals in these plans.

If an employee is injured due to the negligence of another and that employee’s medical expenses are paid by a health benefits plan governed by ERISA, the employer can recover those expenses.

In resolving a personal injury claim, there may be a number of liens of varying types that attach to the settlement proceeds and which must be properly dealt with before ultimately completing the case and disbursing the proceeds to the client and the attorney.

Did you know?

There are two types of ERISA plans that can impact ERISA liens:

• Self-funded plans – Legal counsel must follow ERISA-federal code exclusively.
• Insured third-party plans – Due to insurance, state law comes into play so legal counsel must look to state rules regarding liens.

CERCLA/EPA

The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as Superfund, was enacted by Congress in 1980. This gave the Environmental Protection Agency (EPA) broad powers to identify responsible parties regarding hazardous waste, to impose liability and to ensure compliance with cleanup. In 2002, Brownfield Amendments gave states more direct responsibility for cleaning up sites — and, of course, having liens.

Consequently, CERCLA has created several types of liens:

• Primary CERCLA Lien – Can be imposed on owners where hazardous material was disposed or possessed regardless of FAULT or involvement.
• Maritime Lien – If release or threatened release of hazardous materials is from a vessel.
• Windfall Lien – If an owner has benefited from the cleanup and there exists unrecovered response costs and those costs enhanced the Fair Market Value of the property.

To establish its priority among other secured parties and creditors, the EPA must file notice of the lien in the appropriate office within the state in which the real property subject to the lien is located (or county or other governmental subdivision), as designated by state law. These claims can come before any previously filed UCC, mortgage, judgement and “other federal liens”.

It’s important to note that not every state has the same type of rules regarding super priority for the cleanup.

Did you know?

Recent developments should also be considered. For example, in April 2020, the U.S. Supreme Court determined that CERCLA does not preclude Montana residents from bringing state common law claims to recover the cost of property cleanup beyond the EPA-approved cleanup plan. The Court also ruled that only the EPA has the authority to approve changes to its cleanup plans. Landowners are potentially responsible parties that must obtain EPA approval of remedial work.

Agricultural liens

The definition and requirements of an agricultural lien vary by state but broadly speaking it protects the seller of agricultural equipment by giving them a lien on crops grown with the equipment or rent on real property leased by a debtor in connection with their farming operation.

Did you know?

An agricultural lien is created by the existence of certain conditions specified by the statute and is mainly non-possessory, hence a filing is needed.

Secured parties may need to satisfy additional statutory requirements such as issuing some type of notice (depending on the state’s definition of “notice”). These liens also have a shelf-life.

It’s also important to know that Article 9 rules do not apply to an agricultural lien. Like PMSI filing, it can jump to the priority line.

To perfect a security interest in goods, the UCC typically requires filing where the debtor is located. However, an agricultural lien is perfected by filing in the state in which the collateral is located, not the proceeds of the collateral.

To add to the confusion, some states permit the use of similar filing documents (basically a UCC 1) so it can be interpreted incorrectly.

Tax liens

A tax lien is a lien placed on a property by the government when the property owner has unpaid taxes. Federal, state, and local tax liens are non-consensual because they don't require the debtor's permission.

Did you know?

The IRS records federal tax liens through local authorities, making it challenging to identify them. To conduct tax lien searches effectively, you must have knowledge of the debtor's relevant locations and any variations in their legal or business name. State and local tax lien searches encounter similar challenges as a federal tax lien search.

The government is typically given priority for payment if a tax lien is found.

Tips for discovering hidden liens

As you embark on the lien discovery phase of the due diligence process, take account of the following:

• Consider the transaction – Hidden liens may not always be intuitive. Review transaction details accordingly and consider all available types of liens and refine your search strategy.
• Collect the data – The more information you have, the more questions you can ask. Gather important information such as prior names of debtor/parties, IRS documents, assets, addresses, etc. Confirm the data is reliable.
• Ask the questions – What is the company history? Who are the players? What is their litigation history? What else was communicated? What are the open and closed litigation cases?
• Determine roles – Who is doing what? What is the title company doing? What has been communicated?
• Do your research – Consider all applicable state laws. Where should liens be held? Were the liens perfected? How long are they in effect? Run broad lien searches.

Failure to understand search logic may result in missing hidden liens. It’s important that you understand the databases searched and how their logic works.

Learn more

To learn more about how CT Corporation can help with your search strategy, contact a CT representative.