The Indiana Supreme Court has ruled that the failure of a secured creditor to file a financing statement is considered an “impairment of collateral” which subjects the guarantor to unpredicted liability.
The law in Indiana allows a guarantor of a debt to avoid personal liability when sued by a creditor by proving the “impairment of collateral’ defense. Therefore, a guarantor’s liability may be discharged if the creditor’s conduct unjustifiably decreased the value of the collateral securing the debt.
Generally, the discharge will only be to the extent the value of the collateral is impaired. And, such impairment is to be measured at the time of the default with the burden of proof being on the guarantor to establish the amount of the loss. The lesson to be learned is that the guaranties on a loan may not be of any value if a mistake is made by the secured creditor in creating the security interest in the collateral.
Author: Lori Young (bio)
Phone: 812.452.3560
Email: lyoung@bamberger.com
Tags: impairment of collateral, Lori Young, personal liability