The Broker’s Pitch vs. Reality

A seasoned mortgage broker approached with confidence:

“My client needs a loan to pay judgments, liens, and taxes.  He has a net worth of $10–$20 million.  Would he ever default?”

It sounded straightforward: high equity, defined liabilities, quick resolution.  But once we opened the file, the story changed—fast.

What the File Actually Showed

Our due diligence uncovered a layered, high-risk profile with multiple parties and interlocking obligations:

• Real Estate Portfolio: 15+ properties—some free and clear, others encumbered—subject to recorded lis pendens and existing lien priority concerns.

• Personal Obligations: ~$2M in state and federal tax arrears and civil judgments against the individual; defaults on leased equipment with personal guarantees (estimated $300K exposure).
• Operating Company Obligations: $2M in civil judgments, unpaid employment taxes for nearly two years, and continuing vendor litigation.
• New, Related Company: A newly formed entity (operated by a close relative) took over active accounts and operations—but left legacy debts behind and was still defaulting on equipment tied to personal guarantees.
• Title Insurance Misconception: Borrower and counsel insisted business debts couldn’t attach to personal holdings, implying title insurance would “clear” risk.  In reality, title policies don’t insure against undisclosed or off-record obligations, successor liability theories, or fraudulent transfer claims, underscoring potential gaps.

“When a loan relies on what’s not being said, risk is already priced in—and it’s usually higher than you think.”

The Merry-Go-Round of Secrecy

While the Borrower promoted high equity and quick cures, the facts showed active defaults, tax arrears, litigation risk, and entity maneuvers that appeared designed to park liabilities in one entity while continuing operations in another.  Even worse, personal guarantees on equipment leases create direct, individual exposure—regardless of how corporate shells are arranged.

“Shifting liabilities to a new entity doesn’t erase them—it often multiplies them.”

Why These Hidden Facts Matter

Hidden or minimized liabilities can severely affect lien priority and title clarity, risking future funding and marketability.  Recognizing these risks emphasizes the need for comprehensive due diligence to avoid costly surprises.

• Lien Priority & Marketability: Existing judgments, tax liens, and lis pendens can outrank new liens, blocking funding or slowing future exits.
• Personal Guarantees: Defaults on equipment leases with PGs bypass corporate separations and attach directly to the individual.
• Successor Liability & Fraudulent Transfer Risk: Moving active accounts and assets to a new related company while leaving debt behind invites creditor challenges, including theories of alter ego, de facto merger, fraudulent conveyance, or successor liability.
• Tax Arrears: State and federal tax obligations don’t disappear quietly; they compound, and collection actions can ripple across properties and entities.
• Title Insurance Limits: Title insurance typically does not cover off-record liabilities, intentional concealment, or post-policy successor issues.  It is not a cure-all for Borrower behavior.

 “Due diligence isn’t optional—it’s the only way to prevent someone else’s problems from becoming yours.”

After a thorough review, we declined to proceed due to clear risks: Ongoing defaults, encumbrances, personal guarantees, entity maneuvers, and a mismatch between the broker’s presentation and actual risk.  This underscores the value of cautious decision-making in lending.

After a comprehensive review, we declined to proceed. 

The reasons were clear:

• Pattern of defaults and litigation—both personal and corporate.
• Active, recorded encumbrances, including lis pendens and tax liens, imperil lien priority.
• Personal guarantees tying business defaults to the individual, with future litigation highly probable.
• Entity maneuvering that appeared designed to insulate operating income while leaving creditors stranded.
• A mismatch between the broker’s presentation and the Borrower’s actual risk profile.

“The most profitable loans are often the ones you don’t fund.”

Case Study: What Due Diligence Actually Caught

Here’s a snapshot of the steps and revelations that changed the underwriting narrative:

Documented Steps

• Pulled title, judgment, tax lien, and lis pendens records on all pledged properties.
• Ran UCC-1 searches and cross-checked equipment leases and personal guarantees.
• Queried employment tax and civil judgment databases for the operating company.
• Mapped entity relationships, officers, owners, and signers across old and new companies.
• Analyzed cash flow continuity (same premises, same equipment, duplicate customer accounts) between entities.
• Requested full schedules of liabilities and settlement agreements—received partial disclosures.

Key Findings

• Active equipment defaults with PGs, creating direct personal exposure.
• Two-year lapse in employment taxes, compounding penalties, and enforcement risk.
• Transfer of accounts to a related new entity without an arm’s-length transaction trail.
• Incomplete disclosures and inconsistent statements from the Borrower, counsel, and relative operator.

Red Flags Lenders Shouldn’t Ignore

• Borrower minimization: “Just a few liens and tax issues…” becomes pages of judgments and defaults.
• Entity musical chairs: “Newco” taking revenue while “Oldco” retains debt.
• PGs everywhere: Personal guarantees on commercial equipment and leases.
• Title insurer as a shield: Overreliance on policies to fix non-title risks.
• Duplicated or missing data: Incomplete liability schedules; conflicting statements.
• Tax arrears: Multi-year employment tax neglect and personal tax debt.
• Lis pendens: Pending legal actions that cloud marketability.

“If the Borrower is reorganizing faster than you can underwrite, slow down or walk away.”

A Practical Due Diligence Checklist (Adapt & Use)

Property & Title

• The title reports on every pledged property
• Judgment, tax lien, and lis pendens searches
• Chain of title & recent conveyances

Corporate & Legal

• Secretary of State records for all related entities
• UCC-1 search for equipment and receivables
• Litigation search: civil, tax, labor, vendor disputes
• Review of personal guarantees, cross-defaults, and acceleration clauses

Financial & Operational

• Full liability schedules (personal & corporate)
• Verification of tax compliance (income, payroll, property)
• Bank statements, AR/AP aging, and lease schedules
• Evidence of arms-length transactions between related parties

Insurance & Risk Transfer

• Confirm coverage & loss runs
• Assess title insurance limitations—don’t expect coverage for behavioral risks

Representations & Warranties

• Borrower disclosure affidavit with a penalty for misrepresentation
• Waivers permitting searches and direct creditor contact
• Attorney letter confirming no undisclosed litigation (limited reliance)

Underwriting Structure If You Proceed (When Facts Support It)

If risk is containable and disclosure is full, consider a structure like:

• Tranche funding indexed to verified payoffs of tax liens and judgments.
• Proceeds escrow with control agreements until all senior/pari passu encumbrances are cured.
• Indemnities and repurchase rights triggered by misrepresentation.
• Cross-collateralization plus springing liens on additional assets upon covenant breach.
• Guarantor net worth and liquidity tests, updated quarterly.
• No cash-out until recorded releases are confirmed.

“Structure is not a substitute for honesty—but it can be a hedge against optimism.”

Communication That Prevents Surprises

Here are targeted questions that surface concealed risk:

• “List all personal guarantees and cross-default provisions across operating entities.”
• “Provide current tax transcripts and payroll tax filings for the last 8 quarters.”
• “Identify any related-party transactions in the last 24 months, including asset transfers and account migrations.”
• “Confirm any pending lawsuits, demand letters, or settlement negotiations not yet of record.”
• “Explain any lis pendens or notice-of-default filings, and provide disposition plans.”

Ethical & Legal Considerations (Plain-English)

• Corporate separateness isn’t bulletproof when PGs exist or when courts see alter ego behavior.
• The fraudulent transfer doctrine penalizes the transfer of assets to avoid paying creditors.
• Title insurance protects against specified title defects—it does not insure against concealed obligations, future litigation, or Borrower conduct.
• Tax agencies wield potent remedies; arrears escalate, and enforcement can have ripple effects.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice.  Always consult qualified counsel for jurisdiction-specific guidance.

For Borrowers: How to Regain Lender Trust

• Stop the spin: Deliver complete disclosures—personal, corporate, and related-party.
• Show the cure: Present documented payoff plans for tax arrears and judgments.
• Separate cleanly: If forming a new entity, maintain arms-length terms with audit trails.
• Align incentives: Offer PGs, collateral, or performance covenants that match the risk.
• Embrace accountability: Provide title cures, release letters, and verified settlements first.

Bottom Line

“Borrowers who withhold material facts create exposure.  Lenders who ignore those gaps inherit it.”
“Thorough due diligence isn’t optional—it’s essential.”

In this case, declining the loan was the most prudent course of action.  The lesson is universal: when the narrative relies on what’s omitted, walk the file—not the Borrower’s rhetoric.