CENTRAL BANK and REAL ESTATE OWNED, L.L.C., an Iowa Limited Liability Company, Appellant,
TIMOTHY C. HOGAN, as Trustee of the Liberty Bank Liquidating Trust; LIBERTY BANK, F.S.B.; IOWA STATE BANK; FIRST STATE BANK; FARMERS SAVINGS BANK; FARMERS TRUST & SAVINGS BANK; and FIRST COMMUNITY BANK, Appellees.
from the Iowa District Court for Dickinson County, Carl
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
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.
A. Knickrehm and Andrew R. Biehl of Walentine, O'Toole,
McQuillan & Gordon, L.L.P., Omaha, Nebraska, for appellee
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.).
Factual and Procedural Background.
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.
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.
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.
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.
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.
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.
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.
Standard of Review.
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).
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").
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)
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.
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.
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].
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
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.
The Documentary Record.
The participation agreements.
Bank entered into five sets of documents related to its loan
and the participation of additional banks. Except for dates
and names of the ...