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No Fiduciary Duty Between Lead and Participants

July 10, 2017

Authors

Jerry Blanchard

No Fiduciary Duty Between Lead and Participants

July 10, 2017

by: Jerry Blanchard

A recent decision out of federal court arising out of litigation involving a Ponzi scheme has reinforced the principle that the lead in a loan participation does not owe a fiduciary duty to participants.  The case of Finn v. Moyes (Finn v. Moyes,  2017 WL 1194192 (D Minn 2017)) arose from a Ponzi scheme whereby First United Funding, LLC (“First United”) defrauded numerous banks of over $90 million.  A receiver was appointed to recover funds and sued a number of parties for, among other things, aiding and abetting the fraud carried on by First United.

The receiver claimed that one group of defendants (the “Moyes”) had actual knowledge of the fraudulent conduct and aided and abetted First United by fraudulently over-pledging collateral. The Receiver also alleged that the most of the other loans made

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Loan Sale and Loan Participation Lessons Learned From the Recession, Part 2

January 14, 2016

Authors

Jerry Blanchard

Loan Sale and Loan Participation Lessons Learned From the Recession, Part 2

January 14, 2016

by: Jerry Blanchard

(Note: Part 1 is available here.)

One of the problem areas that came up during the recession was the accounting treatment for loan participations and loan sales. The difficulty arose from the fact that FASB changed the guidance for how to recognize a “true sale” several times over the last decade and not all banks realized that their form documents needed to be changed to reflect those changes. The current guidance is now found in Accounting Standards Codification Topic 860 “Transfer and Servicing” (formerly FAS 166 “Accounting for Transfers of Financial Assets”) which itself was an update of FAS 140 “Accounting Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

If we go back ten years ago, there were several different variations on how loan participations divided distributions from loan payments among the parties. Pro rata is perhaps the most common but it was also typical to see

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Loan Sale and Loan Participation Lessons Learned From the Recession, Part 1

January 7, 2016

Authors

Jerry Blanchard

Loan Sale and Loan Participation Lessons Learned From the Recession, Part 1

January 7, 2016

by: Jerry Blanchard

Watching loan participation activity over the last decade has been like watching the progression of a car on a roller coaster. The early to mid-2000’s showed the car heading ever upward and then in 2008-09 it hurtled downwards at breakneck speed. The last several years have shown a resurgence as the car begins climbing slowly back up the track. Not surprisingly, the FDIC has taken notice of that trend and issued a Financial Institution Letter on Effective Risk Management Practices for Purchased Loans and Purchased Loan Participations in November of 2015.

The reasons why lenders want to sell either loan participations or whole loans and others want to purchase them remain the same today as they were a decade ago. Sellers may have loan to one borrower issues that a loan participation may cure, they may be seeking to reduce overall exposure to a particular borrower or industry or

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FDIC Advisory Letter on Loan Participations

December 9, 2015

Authors

Bill Custer and Julia Fenwick Ost

FDIC Advisory Letter on Loan Participations

December 9, 2015

by: Bill Custer and Julia Fenwick Ost

On November 6th, the FDIC issued an advisory letter discussing risk management practices that FDIC-supervised banks should implement with regards to purchased loans and loan participations. While the FDIC acknowledges the benefits accruing from the purchase of these loans and loan participations, such as achieving growth goals, diversifying credit risk, and deploying excess liquidity, the FDIC also recognizes that purchasing banks have oftentimes relied too heavily on lead institutions when administering these types of loans. In such a case, over-reliance on the lead banks has resulted in significant credit losses and failures of the purchasing institutions. Thus, while the FDIC reiterates its support for these types of investments, the FDIC also reminds banks to exercise sound judgment in administering purchased loans and participations.

A summary of the key takeaways from the FDIC’s advisory letter follows below:

  • Banks should create and utilize detailed loan policies for purchased loans and
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Lessons Learned in Recent Participation Agreement Litigation

December 22, 2014

Authors

Jennifer Dempsey and Bill Custer

Lessons Learned in Recent Participation Agreement Litigation

December 22, 2014

by: Jennifer Dempsey and Bill Custer

Banks have increasingly used participation agreements over the last several decades to pool loans among multiple lenders—with an originating or lead bank selling a portion of the loan to one or more banks as loan participants.  Loan participations can inure to the benefit of both the lead and participating bank, allowing the banks to pool their resources. Through loan participations, lead banks obtain the opportunity to make larger loans to their customers without the obligation to carry the entire asset on their books, and participant banks obtain the ability to participate in larger loans or in different markets than would otherwise be available to them.

To facilitate a loan participation, the lead and participating banks typically enter into a written participation agreement to govern the relationship and the obligations owed to each other with respect to the loan. While often derived from bank forms that have been widely circulated and

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Major Loan Participation Decision Affecting FDIC Successor Rights

April 13, 2014

Authors

Jerry Blanchard

Major Loan Participation Decision Affecting FDIC Successor Rights

April 13, 2014

by: Jerry Blanchard

One of the very powerful rights that the FDIC possesses in any receivership is a provision added by FIRREA which states that the FDIC may enforce any contract entered into by the depository institution notwithstanding any provision of the contract providing for termination, default, acceleration, or exercise of rights upon, or solely by reason of, insolvency or the appointment of or the exercise of rights or powers by a conservator or receiver (i.e., “ipso-facto” clauses). Many typical vendor contracts will oftentimes contain just such a clause providing that one party to the contract can terminate the contract at will if the other party files for relief under the Bankruptcy Code or is taken over by the government. The logic is pretty compelling, a party wants to be able to decide if it is comfortable dealing with an entity that is insolvent or attempting to reorganize.

​A recent Georgia Court of

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Lead Bank – Between a Rock and a Bankruptcy Trustee

January 3, 2012

Authors

Jerry Blanchard

Lead Bank – Between a Rock and a Bankruptcy Trustee

January 3, 2012

by: Jerry Blanchard

The lead-participant relationship arising from a loan participation has become a fairly contentious one over the last two years as the interests of the two have diverged. For example, loan participants that may be in a troubled condition are never terribly anxious to hear that the lead bank has obtained a current appraisal of the primary collateral. Likewise, a strong loan participant my push a weak lead bank to take more decisive action regarding collecting the loan and possibly foreclosing on the collateral. Throw in the implications inherent in a loss-share transaction where a lead bank’s losses may be reimbursed by the FDIC and things really get interesting. At the end of the day, however, the lead bank and the participants generally have the same economic interest in taking steps to maximize the economic recovery on the loan. Likewise, if bad things happen on the loan then lead and participants

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Advice Regarding Loan Participation Disputes

March 15, 2011

Authors

Bryan Cave

Advice Regarding Loan Participation Disputes

March 15, 2011

by: Bryan Cave

One of the unique aspects of the current real estate downturn has been the large number of disputes over participation agreements. While these disputes have occurred in the past, the current downturn has produced more and varied disputes, especially disputes between originating banks and participating banks, than we have previously seen even during other challenging times.

As a result, the various form participation agreements and the standard terms contained in those agreements have undergone considerable scrutiny both inside and outside of litigation. Many Bryan Cave lawyers, including Jerry Blanchard, Bill Custer, or Jennifer Dempsey, have advised numerous banks on all aspects of these agreements and have represented parties in a number of these disputes including:

  • Representing originating/lead banks in disputes brought by participant banks regarding the administration of the loan.
  • Representing participant banks in disputes with originating/lead banks regarding the administration of the loan.
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Federal Court Issues Significant Loan Participation Decision

February 16, 2010

Authors

Jerry Blanchard

Federal Court Issues Significant Loan Participation Decision

February 16, 2010

by: Jerry Blanchard

On February 9, 2010, a federal district court in Macon, Georgia issued a noteworthy decision in a dispute over a participation agreement finding the lead bank to have breached the agreement and ordering the lead bank to repurchase an interest from a participating bank.

The case of Sun American Bank v. Fairfield Financial Services, Inc. involved a claim by Sun American that Fairfield Financial had breached its obligations under a loan participation agreement involving a condominium project in north Florida.  Sun American contended that Fairfield Financial had breached the agreement by failing to disclose to participants in a timely manner the downgrades in its credit relationship with the borrower and of circumstances that were likely to have a material, adverse effect on the loan.  Sun American sought to compel Fairfield Financial to repurchase its interest in the loan as a remedy for the breach.

Judge Ashley Royal, of the

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TARP Capital Recipients

October 29, 2008

Authors

Robert Klingler

TARP Capital Recipients

October 29, 2008

by: Robert Klingler

The Wall Street Journal has compiled a database showing banks that annouced Treasury approval for TARP Capital, including the amount of capital that Treasury has committed.  As of the morning of October 29, 2008, the smallest institution to be included is First Niagra Financial Group, which had approximately $9.0 billion in assets as of September 30, 2008.

In today’s Research and Trading Thoughts, FIG Partners includes a TARP Scorecard for TARP Participants, that analyzes the warrant pricing and concludes that investor complaints about dilution should be curtailed.  The FIG Partners analysis includes an announcement by Saigon National Bank that they have been approved by the Treasury Department.  Saigon National Bank is a de novo institution located in Westminster, California with $43.2 million in assets at June 30, 2008, and is traded on the Over-The-Counter market.  We are seeking more information from management, and will update as

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