Many lenders and law firms are acutely aware of the need to conduct tax lien searches when doing due diligence public record searches for commercial loans. When a state or federal agency files a notice of a tax lien, it can have priority over subsequently perfected security interests in the assets of the debtor (with some possible exceptions, such as properly perfected purchase money security interests).
As a result, lenders and law firms typically request state and federal tax lien searches when they order UCC searches. In Illinois, the tax lien searches normally include conducting a search at the County Recorder level to discover any tax liens encumbering real property. In addition, federal tax liens meant to attach to the personal property of businesses, estates, partnerships and trusts are filed with the Secretary of State of Illinois in a separate index from the UCC records, so searching this index is also important.
Liens Your Typical Due Diligence Searches Might Miss
By conducting UCC searches and tax lien searches in both locations, one would assume that a lender is reasonably covered, right? Well, that may not exactly be the case. Perhaps a little known fact is that in Illinois, a more subtle, hidden type of lien may exist due to a corporation not being timely and diligent in the filing of its annual report and ancillary franchise tax payment. In fact, a domestic corporation can be administratively dissolved in Illinois, or a foreign corporation can be revoked, for failure to file the annual report and pay franchise taxes within four full months of its due date. In addition to the dissolution/revocation notice sent to the company, a second follow up letter may be sent about one month later that reminds the company of Section 15.80(d) of the Illinois Business Corporation Act, which reads as follows:
“For the purpose of enforcing collection, all annual franchise taxes payable in accordance with this Act, and all penalties due thereon and all interest and costs that shall accrue in connection with the collection thereof, shall be a prior and first lien on the real and personal property of the corporation from and including the date of the year when such franchise taxes become due and payable until such taxes, penalties, interest, and costs shall have been paid.”
While no actual lien notice is drafted and put on file in the public records of the county or the state, the language of this act and the dissolution record itself serves notice that a lien exists. Bringing this to the attention of the company will give them the opportunity to reinstate, pay franchise taxes in arrears, maintain corporate existence or voluntarily dissolve as needed.
Due to the state’s statutory ability to obtain a “prior and first lien on the real and personal property” of corporations that are dissolved or revoked for failure to file their annual reports and pay franchise tax due, it is advisable to search the corporate records of the State of Illinois when conducting due diligence on corporations doing business or domiciled in Illinois. (Note that a check of the state’s database should not be relied upon for determining or confirming the legal name of the corporation for the purposes of listing the name correctly on a UCC financing statement. See our blog posting "Do You Need to Re-Evaluate How You Verify Entity Debtor Names on Your UCC Filings?") A corporate status check can reveal if an entity has been administratively dissolved or revoked for failure to pay franchise taxes and can alert potential lenders to the possibility that a hidden lien exists that needs to be cleared up.
It is our understanding that, at least at the present time, the Secretary of State is only sending the second follow-up letters to corporations who owe more than $500 in franchise tax. However, since the statutory wording does not limit such action by the state based on the amount owed, prudence would dictate that lenders ensure these hidden liens do not exist for any borrower that is a corporation formed or qualified in Illinois.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.