When buying a business, the buyer should ensure that all assets must be free and clear of liens. As a reminder, when purchasing a business, you can purchase either the ownership (the stock or the membership interest, for example) or the assets. Either or both can be subject to liens. Therefore, it is imperative that a lien search be conducted.
Personal property liens are filed in the state of organization of the entity (for example, a Nevada entity would be filed with the Nevada Secretary of State) or the principal place of residency for a natural person. If you are purchasing stock or membership interests, ask to see the certificates (because a lien can be valid by mere possession of those certificates). Liens on real estate and fixtures are filed in the County Recorder where the real property or fixtures are located.
Lien holders on personal property will record what is called a financing statement on a Form UCC-1 with the appropriate Secretary of State. As to real property and fixtures, such a filing can be made as part of a deed of trust or on a UCC-1 that identifies itself as a fixture filing. Additionally, the IRS will file liens for taxes due with either recording body. Judgments are typically filed in the county where assets are located for the particular debtor.
The significance of all of this information is that your purchase is subject to existing liens. The recordation system that is described above is to impart constructive notice to buyers. It is simply not good enough to close your eyes and pretend the property “must be” free and clear since the seller says so or because ignorance is bliss. All that buys you is a lawsuit with the seller and its creditors.
By: Guest Blogger Mary J. Drury, Esq.