UCC filing complications when debtor has existing tax lien - priority concerns

That's what I'm trying to figure out. The debtor claims it's from 2023 but won't give us specifics. How do I even search for federal tax liens? Is there a central database or do I need to check with each county clerk?

Federal tax liens get filed at the state level usually with the Secretary of State, same place as UCC filings. But some states file them with county clerks depending on the type of property. You'll want to search both places to be thorough.

That's somewhat reassuring. Can you elaborate on what made your situation work out? Were you able to maintain priority or did you have to work something out with the IRS?

We maintained priority because our UCC-1 was filed before the tax lien and the equipment qualified as 'motor vehicles' under the federal guidelines, which have different priority rules. Your heavy machinery might fall into a similar category.

Wait, I thought all federal tax liens automatically took priority over private security interests? This is news to me.

Good point about document consistency. I hadn't thought about how filing errors might compound the priority problem. How does that document checker work exactly?

You just upload PDFs of your documents and it cross-checks everything - debtor names between your loan agreement and UCC-1, collateral descriptions, filing numbers, dates. Takes like 5 minutes and catches things that are easy to miss when you're doing manual reviews.

I get the frustration but tax liens serve an important purpose. The issue is that federal tax liens have their own statutory scheme that sometimes conflicts with state UCC law. It's not necessarily about right or wrong, just competing legal frameworks.

I know, I know. It's just aggravating when you think you've done everything by the book and then some other creditor pops up with different rules.

This is exactly why we always do comprehensive lien searches before closing any equipment deals. Better to find these issues upfront than after the money's already out the door.

Thank you, this is exactly the kind of specific guidance I needed. I'll look up that IRC section. Do you know if excavators and dozers would qualify under the motor vehicle exception?

It depends on whether they're self-propelled and designed for highway use. Construction equipment that's only used on job sites typically doesn't qualify for the motor vehicle exception. But there might be other exceptions that apply to business equipment.

That's a really good point. The debtor mentioned they're on a payment plan but didn't specify how much they still owe or if they're current on payments. How did you verify the lien status?

We had our attorney request a payoff statement directly from the IRS. Took a few weeks but it showed the lien was actually satisfied. The debtor just hadn't followed up on getting the release filed.

It's not super common but it happens enough that we build lien search costs into our due diligence budget. Usually runs about $150-300 depending on how many jurisdictions we need to search.

We've started requiring borrowers to provide tax compliance certificates from their CPA as part of the application package. Helps catch issues before they become problems.

I hadn't thought about requesting subordination. Is that something we'd need to do through an attorney or can we approach the IRS directly?

Definitely go through an attorney who handles tax matters. The IRS has specific forms and procedures for subordination requests, and you want to make sure it's done correctly.

Subordination can work but it takes forever. We tried this route once and it took 8 months to get a response from the IRS. By then our borrower had already defaulted on something else.

Smart approach. Better to spend a little time and money upfront verifying everything than to find out later that a small filing error complicated your position even more.

Keep us posted on how it works out. These priority conflicts are always fact-specific so it'll be interesting to hear what your attorney concludes about your particular situation.

Inventory financing actually has different risk profiles than equipment deals. The collateral turns over more frequently so even if there are existing liens, they might not affect your security interest in the same way.

Still worth doing basic searches though. Tax liens can attach to all business assets, not just specific equipment. Better safe than sorry.

Good reminder. I'll need to review our standard loan docs to see how strong our lien disclosure language is. This whole situation is definitely a learning experience.

It's one of those things you never think about until it happens to you. Most borrowers are honest but the ones who aren't can really create headaches.