Central Bank and Real Estate Owned, L.L.C. v. Hogan

         Appeal from the Iowa District Court for Dickinson County, Carl Petersen, Judge.

         Bank appeals grant of summary judgment to appellees in an action seeking a declaratory judgment that the bank had no obligations under participation agreements entered into by the bank's predecessor in interest. AFFIRMED.

          Nicholas J. Brown of Nick Brown, P.C., Storm Lake, for appellant.

          Robin K. Carlson of Stinson Leonard Street L.L.P., Kansas City, Missouri, and Scot Bauermeister of Fitzgibbons Law Firm, L.L.C., Estherville, for appellee Timothy C. Hogan.

          Craig A. Knickrehm and Andrew R. Biehl of Walentine, O'Toole, McQuillan & Gordon, L.L.P., Omaha, Nebraska, for appellee participant banks.

          APPEL, Justice.

         In this case, we deal with the question of whether participation agreements in connection with a loan transaction transferred security interests in the underlying property or only a contractual right to the proceeds from the originating bank. For the reasons expressed below, we conclude that the participating agreements transferred security interests in the underlying property to the participating banks and that those security interests were perfected under article 9 of the Uniform Commercial Code (U.C.C.).

         I. Factual and Procedural Background.

         Between 2008 and 2009, Liberty Bank made five loans to Iowa Great Lakes Holding, L.L.C., the owner of real property known as "The Inn at Okoboji" (The Inn). The Liberty Bank loan (the loan) was secured by real and personal property associated with The Inn. Liberty Bank and five other banks entered into participation agreements related to the loan. Under the participation agreements, Liberty Bank maintained an undivided 59.48% interest in the transaction, while the participating banks held an undivided 40.52% interest.

         Iowa Great Lakes Holding defaulted on the loan and the collateral was voluntarily surrendered to Liberty Bank through a "Voluntary Surrender Agreement" and an "Agreement for Alternative Nonjudicial Foreclosure" pursuant to Iowa Code section 654.18 (2014), thereby extinguishing the mortgage. After the surrender and foreclosure, Liberty Bank and the participating banks entered into an agreement with a hotel management company to operate The Inn. The proceeds of operations were held in a segregated account with Liberty Bank with the participating banks maintaining their pro rata interest in the proceeds.

         On October 1, 2013, Liberty Bank and Central Bank entered into a "Purchase and Assumption Agreement" (P&A Agreement). Under the P&A Agreement, Central Bank acquired assets from Liberty Bank, including "loans." Under the P&A Agreement, the term "loans" was broadly defined to include loans in which the borrower's obligations had been extinguished. The Great Lakes loans remained on the books of Liberty Bank as nonledger loans.

         At the time of closing of the P&A Agreement, Liberty Bank conveyed The Inn to a Central Bank affiliated entity via quitclaim deed. The language of the quitclaim deed indicated that it transferred only the interests of Liberty Bank.

         In 2014, Central Bank filed a declaratory action against the trustee of Liberty Bank and the five participating banks. Central Bank sought a ruling that it owned The Inn property free and clear of any interest of the participating banks.

         The trustee for Liberty Bank and the participating banks filed a joint motion for summary judgment. They maintained that under the participation agreements, Liberty Bank transferred to them an undivided interest in the entire transaction, including the security interest of Liberty Bank.

         The district court agreed. According to the district court, the participation agreements did not merely transfer the right to a share of loan proceeds. Instead, according to the district court, the participation agreements transferred "all legal and equitable title in its share of the loan and collateral" to the participating banks. As a result, the district court granted summary judgment to the trustee for Liberty Bank and the participating banks, stating that it could not declare that Central Bank owned the property in fee simple because Liberty Bank did not sell Central Bank a one hundred percent interest in the property.

         Central Bank appeals.

         II. Standard of Review.

         Generally our standard of review for declaratory actions is determined by the nature of the action below. Lindsay v. Cottingham & Butler Ins. Servs., Inc., 763 N.W.2d 568, 572 (Iowa 2009). When a summary judgment is granted on a declaratory action, however, we review for correction of errors at law because we are reviewing the summary judgment ruling, not the declaratory judgment. Shelby Cty. Cookers, L.L.C. v . Util. Consultants Int'l, Inc., 857 N.W.2d 186, 189 (Iowa 2014).

         III. Discussion.

         A. Introduction.

         Participation agreements have been around at least since financiers successfully sought additional parties to participate in a massive loan to the imperial Russian government in 1916-an undertaking which, as events subsequently showed, was a poor investment. Jeffrey D. Hutchins, What Exactly Is a Loan Participation, 9 Rutgers-Camden L.J. 447, 450 (1978) [hereinafter Hutchins]. Although not limited to financial institutions, participation agreements have played an important role in the banking sector of the American economy. See Alan W. Armstrong, The Developing Law of Participation Agreements, 23 Bus. Law. 689, 689 (1968) [hereinafter Armstrong] (describing the rapid development of participation agreements and their economic benefits); Hutchins, 9 Rutgers-Camden L.J. at 447 (noting that loan participations are "widely used throughout the financial community in recent years").

         The usual participation agreement involves a lead lender and participating parties. Hutchins, 9 Rutgers-Camden L.J. at 448. The transaction is documented by a participation agreement and a summary page called a certificate of participation. Patrick J. Ledwidge, Loan Participation Among Commercial Banks, 51 Tenn. L. Rev. 519, 521 (1984) [hereinafter Ledwidge].

         The participation agreement, of course, may contain a wide variety of provisions agreed upon by the parties. Hutchins, 9 Rutgers-Camden L.J. at 449. Under most participation agreements, however, the lead lender is ordinarily responsible for originating the loan, but seeks to share the financial obligations and benefits with other parties. Id. at 448. The lead lender ordinarily assumes responsibility for the servicing of the loan. Id.

         The reasons for loan participations are varied. Id. at 449. A bank may seek third-party participation in a loan transaction to avoid borrowing limits or to promote diversity in its loan portfolio. Ledwidge, 51 Tenn. L. Rev. at 521-22. Alternatively, a customer may prefer involving multiple banks with whom it has relationships in a loan transaction. Id. at 522.

         This case involves an issue that has surfaced only relatively recently-namely, what happens to the interests of participants when the lead bank fails? In the distant past, financial institutions rarely failed and thus the question was largely academic. See generally James W. Brewer & Elaine Childress Lee, Bank Failure and the FDIC: A Survey of Legal Rights and Relationships of the Client and the Insolvent Bank, 18 Tex. Tech L. Rev. 1193, 1193-94 (1987). Beginning with the failure of financial institutions in the 1970s and 1980s, however, the question of the status of participants in a loan transaction after the failure of the lead bank has become a topic explored in a number of cases and in the academic literature. See Kevin B. Fisher, Loan Participations and Bank Failures: The Penn Square Decisions, 44 Sw. L.J. 753, 754-58 (1990) [hereinafter Fisher].

         In this case, the loan originated with Liberty Bank. The borrower entered default and the collateral securing the loan, including real property known as The Inn, was voluntarily surrendered to Liberty Bank. After surrender of the property, Liberty Bank voluntarily dissolved and was taken over by a trustee. The trustee then sold the surrendered collateral associated with The Inn to Central Bank through a quitclaim deed.

         The question in this case was whether Central Bank owns the entire property in fee simple as a result of its transaction with the trustee. We begin our analysis by reviewing the terms of the various agreements and documents in this case.

         B. The Documentary Record.

         1. The participation agreements.

         Liberty Bank entered into five sets of documents related to its loan and the participation of additional banks. Except for dates and names of the ...