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

(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

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

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

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

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 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

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

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

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