Car with 2nd lein?

I purchased a new car and traded in my 4 year old vehicle. The dealership took the trade and sold me a new car which was not financed through the dealer or any of their finance companys. Almost thirty days later the dealership is trying to make me pay for a second lein on the traded vehicle. The lein was for a in good standing personal loan 2 years old and i continued my payments in may 2007 and was informed by this loan company that the loan was paid by the dealer. before the dealer could do anything with the car and have the lein removed they bought them out. I honestly forgot about the lein and a lein check should have been conducted before the sale, Now the dealer is threatning to sue me for 2,755.00 the amount they paid to have the lein released. What are my rights, what procedures must they follow to sue me. I prefer to reasume my loan with the company but they delined because the account is paid in full.