[Source: Samuel I. Kreamer, J.D., C.P.A., Kreamer Law Firm, P.C., 01.2016 | Keywords: Used Equipment, Trade-In]
As we are all aware, banks (or other lenders) take a VERY dim view of customers who do not repay their loans. To increase the odds that their loan will get repaid, lenders routinely require borrowers to grant the lender the right to repossess and sell specific assets in satisfaction of their loan. This is alternately stated as: the borrower grants the lender a security interest (a “Lien”) in a specific asset (the “Collateral”).
Sometimes borrowers try to sell (or use as trade-in) the bank’s Collateral. In these cases, UNLESS THE LENDER ISSUES A RELEASE OF THE LIEN, the lender’s Lien survives the sale/transfer and continues to be a lien on the collateral. If the borrower fails to pay the lender (regardless of WHY they fail to pay), the lender can STILL repossess the collateral (from the buyer, the dealer, or the customer to whom the dealer sells the asset) and sell it to pay off the loan.
There are two main exceptions to this rule:
1. The buyer (the dealership) is a purchaser of the collateral without notice of the Lien
If the lender has properly recorded its Lien, it is not possible for a buyer (or a dealer accepting a trade-in) to be a purchaser without notice of the Lien. We urge our clients to follow the advice of President Reagan:
“…trust but verify.” In these situations we recommend that our dealership clients:
- ASK their customers (even customers they have known for a LONG time):
a. If there is a lien on the equipment, and if so, the contact information for the holder of the lien;
b. For the customer’s:
i. Name, address, date of birth and social security number
ii. The name and address of any business they own
iii. The name, address, phone number and contact information for all of the customer’s lenders during the past 5 years
Check the records of the Secretary of State for UCC filings for all names
• Contact the lenders indicated by the customer (even if the Secretary of State’s records indicate that no filed security interest is recorded – sometimes the Secretary of State‘s website records are incorrect; sometimes the Lien is under a different name).
If this process discloses a security interest in favor of a lender, the Lien must be released by the lender for the buyer [Dealer] to own (and therefore have the right to sell) the equipment free and clear of any interest held by the lender.
2. When the asset is not included in the description of the collateral
It is common practice for lenders to take a Lien on all the assets of a borrower or to simply list a class of assets as the collateral (example: farm equipment). This is normally referred to as a “blanket lien.” Sometimes borrowers don’t even realize that these liens are in place.
In cases where there is a blanket lien, there can be an issue as to whether a particular piece of equipment is subject to the lender’s Lien. In these situations we recommend that dealers obtain either a release of the lender’s interest in the Collateral or a statement from the lender that the lender has NO interest in the asset which is the subject of the transaction.
You will find forms we have produced for the Iowa-Nebraska Equipment Dealers Association at ineda.com. Please check with your attorney before using these forms.
If you have questions regarding obtaining releases of security interests or any other legal matters, contact the Kreamer Law Firm, P.C. at 515-727-0900 or [email protected]