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 United States District Court for the Middle District of Georgia, granted summary judgment in favor of Sun American finding that Fairfield Financial had failed to meet its disclosure obligations to the participants.  Judge Royal noted that the disclosure requirement with respect to credit downgrades was particularly important given that the lead bank possessed substantial information regarding the borrower’s affairs that was not available to Sun American as a participant bank.

Judge Royal also held that because of its breaches of the participation agreement, Fairfield Financial was required to repurchase Sun American’s participation interest in the subject loan for the original purchase price of $1.9 million plus interest.  Judge Royal held that the repurchase remedy, a common feature of participation agreements, was enforceable as a reasonable method for restoring the parties to their original position.

Bryan Cave represented Sun American Bank in the dispute.  If you have any questions about the potential impact of this decision on one of your participation agreements, please don’t hesitate to call Bryan Cave lawyers Bill Custer (404.572.6804), Jerry Blanchard (404.572.6804) or Walt Moeling (404.572.6804).