Central Bank and Real Estate Owned, L.L.C., an Iowa Limited Liability Company v. 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
891 N.W.2d 197
| Iowa | 2017Background
- Liberty Bank originated five loans (2008–2009) secured by real and personal property for "The Inn at Okoboji." Liberty retained 59.48% undivided interest; five participant banks held 40.52% via near-identical participation agreements.
- Borrower defaulted; borrower voluntarily surrendered the Inn to Liberty Bank and Liberty executed a voluntary nonjudicial foreclosure under Iowa law.
- Liberty and participants later contracted with a manager; proceeds were held in a segregated account with Liberty holding its pro rata share and participants holding theirs.
- Liberty Bank became insolvent; a trustee sold Liberty’s interest in the Inn to Central Bank under a Purchase & Assumption (P&A) agreement; Liberty conveyed via quitclaim deed and Central knew participants existed.
- Central Bank sued for declaratory judgment asserting it owned the Inn free of participant interests; the district court granted summary judgment to the trustee and participating banks, holding the participation agreements conveyed undivided ownership interests in the loan and collateral. Central Bank appealed.
Issues
| Issue | Central Bank (plaintiff) argument | Trustee & Participating Banks (defendant) argument | Held |
|---|---|---|---|
| Whether the participation agreements conveyed only a contractual right to loan proceeds (debtor–creditor) or an ownership interest in the loan and collateral (sale/assignment) | Agreements created a debtor–creditor relationship; participants only had contractual claims against Liberty, not rights in collateral | Agreements sold undivided fractional ownership interests in the loan and underlying collateral; trust language and default clauses show ownership | Court held the agreements conveyed an undivided ownership interest in the loan and collateral (sale/assignment) |
| Effect of Liberty’s quitclaim deed to Central Bank | Central’s quitclaim transferred Liberty’s full interest in the Inn, free of participant claims because participants had no property interest or perfected security interest | Quitclaim conveyed only Liberty’s fractional interest; as a quitclaim grantee Central took subject to participants’ equities and pro rata ownership | Court held the quitclaim transferred only Liberty’s interest; Central took subject to participants’ undivided interests |
| Whether participants held a perfected UCC security interest in the collateral | No security interest attached or was perfected because participation agreements did not create a security agreement; participants failed to file UCC or record mortgages | Participation interests are payment intangibles/security interests under Article 9; attachment and automatic perfection principles apply to payment intangibles, making participant interests enforceable and tied to collateral | Court did not decide perfection; held participants owned an undivided interest in the collateral so question of UCC perfection was unnecessary to resolve |
| Whether Central Bank is a bona fide purchaser protected from participant equities | Central claims protection under recording statutes and buyer status | Participants point to Central’s knowledge of participations and the quitclaim nature of deed, which defeats bona fide purchaser protection | Court found Central had notice of participant interests and, having received only a quitclaim deed, could not claim protection as a bona fide purchaser |
Key Cases Cited
- Jefferson Sav. & Loan Ass’n v. Lifetime Sav. & Loan Ass’n, 396 F.2d 21 (9th Cir.) (participation can create cotenancy/trust interest in loan and collateral)
- Stratford Fin. Corp. v. Finex Corp., 367 F.2d 569 (2d Cir.) ("in trust" language supports participant entitlement to identifiable proceeds)
- Asset Restructuring Fund, L.P. v. Liberty Nat’l Bank & Resolution Trust Corp., 886 S.W.2d 548 (Tex. Ct. App.) (majority rule: participation transfers ownership interest in loan and collateral)
- In re Drexel Burnham Lambert Group, Inc., 113 B.R. 830 (Bankr. S.D.N.Y.) (participation assigns undivided ownership interest in collateral; participants are trust beneficiaries)
- Ross v. First Sav. Bank of Arlington, 675 N.W.2d 812 (Iowa 2004) (participation characterized as transfer of an intangible right; limited participant control over borrower)