You negotiated a payoff with a secured lender. The amount you wrote down is not the finish line, though. Your collateral is subject to a UCC lien, and that has to come off too. The document that does it is a payoff letter. It’s more than a statement of the payoff amount. It’s the document that sets out the conditions on which the lender will terminate the loan documents and release its liens on your collateral. That makes the payoff letter worth negotiating as carefully as the number itself.
If your lender is holding its signature page to the payoff letter ‘in escrow’ until the funds come in, push back. The release of lien has to be expressly conditional upon the conditions in the letter (i.e., receipt of funds), not on the enforceability of the letter itself. Someone has to go first, and the lender has to go first. The lender is protected because, if it doesn’t get 100% of the money, it doesn’t have to release anything. Here is the risk: if the payoff letter stays ‘in escrow’ until the funds are received, then the payoff is sent based on a letter that isn’t effective yet. There’s no enforceable agreement that the UCC filings will be released when the payoff amount is sent, so you’re at risk if the existing lender changes its mind and returns its escrowed signature pages while the payoff is in transit. But if timing will change the amount, add a per diem or expiration date.
The most common fights over payoff letters center around the question of the correct payoff amount, fees, and breakage. Many of those issues are worked out eventually. A harder problem is when the lender insists that the borrower sign a general release of the lender as a condition of the lender providing a payoff letter. When the borrower says it wants to keep possible claims against the lender, that creates a stalemate.
What the Law Says
Whoever sits across the table from the lender, you or a business debt settlement company like Delancey Street, where our senior advisors negotiate with funders and lenders for less than the full balance owed, it helps to know what the law says if the lender won’t budge. The lender that you’ve been paying off is not obligated to give you a payoff letter unless it’s in the loan agreement. However, it’s required to give you the payoff amount. And under New York UCC 9-210, the borrower may request and obtain an accounting of unpaid obligations secured by collateral, or ask the lender to approve or correct the borrower’s own figure as of a date. Once the borrower pays the full payoff amount, the lender is required to release its liens. (Courts say no lien without a debt.)
Just because you’re out of debt doesn’t mean that no one else knows it. A UCC financing statement can still be hanging around, looking like the debt never got paid, and if you haven’t been issued a payoff letter expressly authorizing you to terminate that financing statement, then you need the lender’s authorization to do so. And under UCC 9-513(c), the lender has 20 days to file a termination statement or authorize you to after it receives an authenticated demand for termination from the borrower. If it doesn’t, the borrower can file the termination statement itself under UCC 9-509(d).
When you disagree with the payoff amount a lender is demanding, it’s easy to think you can pay what the lender demands and fight about it later. It’s a bad idea. Under the voluntary payment doctrine, you can’t get back money you voluntarily paid with full knowledge of all the relevant facts, unless there was fraud or a mistake of material fact or law. The protest has to be in writing and done at the time of the payment.
Keeping other claims against the lender is harder. The law here is sort of murky, but the safest way is to state your reservation of rights in writing no later than the time of the payoff. The reason has to do with extension of the voluntary payment doctrine. If you don’t explicitly reserve your rights when you make the payoff, the law might be that all of your existing claims against the lender have been waived. An open question is whether the lender could refuse your full payment because of the reservation of rights. The better view is probably not, because the lender is legally owed only the full payment, not a general release.
Open-ended Litigation Is Not Worth It
So on paper, the borrower probably wins. A court would sooner or later force the lender to accept payment, subject to a reservation of rights, and issue a release of its liens. But that route is rarely sensible. The reason, first, is timing: Closings have to happen within a certain time frame, and open-ended litigation is not worth it unless the claim at stake is worth an open-ended delay. The second point is the legal costs, both the time you spend on it before you even get a motion filed, and the protracted costs of actually litigating it. Third, if you are refinancing, there is the new lender. That new lender would have to approve funding a secured loan even though it would have no written confirmation that its liens would be first priority after the payoff was sent. With no special circumstances, it’s unlikely the new lender would take that risk.
Should you sue anyway? That’s a legal question. We’re not a law firm. When litigation is the right call we’ll refer the owner to an independent attorney, and the attorney-client relationship will be between the owner and that attorney.
Two Routes
When settling a secured debt, the bottom line from the owner’s perspective is that if you and the lender can’t agree on a payoff letter, there are two routes. First, you put the closing on hold, you spend a bunch of time and money to try and litigate, and then you likely end up in more or less the same spot as you would have if you’d just taken a payoff letter. The second, better route is simpler: cooler heads, pointing to market convention, a well-timed relationship call, will generally get the parties to agree an adequate payoff letter so the deal closes as planned. Always treat the lien release as part of the deal you negotiate, not an afterthought.
