Skip to Content

Earlier this month, the United States Bankruptcy Courts for the Western District of Pennsylvania and the Southern District of New York issued decisions that could drastically affect the rights of lenders who take a security interest in collateral subject to a prior termination or satisfaction of lien. 

The crux of both decisions is that a subsequent secured lender cannot take a prior lender’s recorded satisfaction of a mortgage or termination of a UCC financing statement at face value.  Instead, the secured lender must inquire of the prior lender whether it actually authorized the termination of its interest and confirm that the termination of record is not a result of fraud1 or mistake.2  This will likely require lenders to change their closing checklists and their procedures for extending credit.                 

The best way for a secured lender to protect its lien priority under these circumstances is to obtain a de novo estoppel letter or other written verification from the previous lender confirming that the release or termination was authorized.3  The next best approach would be to obtain a verified copy of the payoff letter at the time the lien was released along with evidence of payment of that sum (such as a closing statement).  If neither attempt is successful, the last approach would be for the subsequent lender to provide the former secured party with written notice that it is inquiring as to the validity of the release or termination and that the former secured party should advise within fourteen (14) days if it contends that the release or termination was not authorized. 

If the former secured party does not respond, this evidence could later be used in a possible priority dispute to suggest that the former secured party was negligent and should bear the risk of loss in the event its interest was satisfied or released as a result of fraud or mistake. 

        1 Primerock Real Estate Fund, LP v. RAG East, LP, et al (In Re: Rag East, LP), No. 12-02454 (Bankr.W.D.Pa. March 4, 2013). 

        2 Official Comm. Of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A. 
         (In Re: Motors Liquidation Co.), No. 09-00504 (Bankr. S.D.N.Y. March 1, 2013)

        3 UCC-3 termination statements are particularly problematic because they do not even require the signature of the secured party.