This follows-up my post: Indiana’s Mortgage Release Obligations. Today’s post relates, not to real property mortgage liens, but rather to personal property Uniform Commercial Code liens (security interests).
Duty to terminate.
Unlike mortgages, the applicable Indiana statutes do not automatically compel lenders/creditors to terminate (aka release) their UCC financing statements upon payment in full of the underlying commercial/business debt. Instead, the onus is on the debtor/borrower to ask. Indiana Code § 26-1-9.1-513(c) states:
[W]ithin twenty (20) days after a secured party [creditor] receives an authenticated demand from a debtor, the secured party shall cause the secured party of record for a financing statement to send to the debtor a termination statement for the financing statement or file the termination statement in the filing office if:
(1) except in the case of a financing statement covering accounts or chattel paper that has been sold or goods that are the subject of a consignment, there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value….
Thus, if directed to do so by the borrower following the resolution of the underlying debt, the lender must tender a termination statement within twenty days. (Note: Subsections (a) and (b) deal with consumer goods and operate like Indiana’s mortgage release requirement.)
Official Comment 2 to the statute appears to provide a rationale for why the law treats UCC liens differently than mortgages. “Because most financing statements expire in five years … no compulsion is placed on the secured party to file a termination statement unless demanded by the debtor, except in the case of consumer goods.” My 6/6/13 post explains that Indiana mortgages do not expire in a tight, five-year window.
Indiana Code § 26-1-9.1-625 “Remedies for secured party’s failure to comply with chapter” outlines the repercussions associated with a lender’s failure to terminate its UCC financing statement under Section 513.
First, injunction-like relief under subsection (a) is available: "If it is established that a secured party is not proceeding in accordance with IC 26-1-9.1, a court may order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.”
Second, damages may be awarded under subsection (b), which states: “[A] person is liable for damages in the amount of any loss caused by a failure to comply with IC 26-1-9.1. Loss caused by a failure to comply may include loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing.”
Third, a $500 fine may be imposed under subsection (e), which provides: “In addition to any damages recoverable under subsection (b), the debtor … in a filed record … may recover five hundred dollars ($500) in each case from a person that: … (4) fails to cause the secured party of record to file or send a termination statement as required by … IC 26-1-9.1-513(c)…."
The upshot is that, upon a full payoff, it’s in the lender’s best interests to terminate its financing statement. This is especially true if the borrower demands it.
Settlements/Compromises. As with mortgages, the statutory scheme seems to be limited to situations involving a full and complete payoff – the entire debt including interest. The rules do not apply to settlements, compromises, short pays, etc. Hence the need, in settlement agreements arising out of loan disputes, to compel the lender/creditor to terminate its financing statement at closing.
I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.