The short answer is that anyone can sue anybody, it is up to the person being sued to show their defenses. In your case, you have the burden to prove the loan was paid off.
Have you been served with a summons and complaint, or is this a threat letter you are talking about? If you have been served a summons and complaint you need to hire a lawyer as soon as possible in order to present your defenses, and evaluate whether you have any counterclaims which could be presented. I do not recommend handling this on your own if you have actually been sued.
If this is just a demand letter threatening a lawsuit, you should respond by sending a letter disputing the debt, enclosing proof of payment (dig up copies of the canceled checks or other proof of payment) along with a copy of the documentation that you have showing the lien release. Say in the letter that you dispute the debt because the loan was paid in full. Send the letter certified mail, return receipt requested, keep a signed copy, and keep the "green card" that comes back showing who signed for the letter and the date it was received. Send the dispute letter no more than 30 days after you received the demand letter from them.
You should consult a consumer attorney even if you just got a demand letter, to see if you have any claims against any collection agencies. Check your free credit reports at www.annualcreditreport.com to make sure the loan is not being reported as delinquent on your credit.
This message is intended for informational purposes only. It is impossible to consider all relevant facts from a message board question. No attorney-client relationship has been created. Readers should seek a personal legal consultation with an attorney of their choice for the most accurate advice. I offer a free consultation by phone or e-mail.
I agree with Ms. Coleman. In our statement, you indicate that you have copies from the DMV showing that the lien was released. Liens can be released for a number of reasons, full payment is not necessary and the creditor can release it at any point. The release of the lien does not necessarily mean that the loan was paid off. In your statement you never mentioned that you paid the loan in full.
I have seen a number of cases where a lender for a number of reasons, including default or deficient payments by the borrower cancel the lien and write it off, then file an insurance claim with HUD...this leads to HUD suing you. You need to consult an attorney to defend this action.