Daily Development for
Monday, May 29, 1995

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

BANKING LAW; LOAN PARTICIPATION; COLLATERAL: Bank that purchases participation interest in loan has ownership interest in loan and underlying collateral, not just in collections from loan. Asset Restructuring Fund v. Liberty Bank, 886 S.W. 2d 548 (Tex. App. 1994). Following the lead bank's foreclosure upon and acquisition of the collateral, but before the lead bank had liquidated the collateral, the participant (RTC) assigned its interest to a third party. The dispute here involved the terms of the assignment, which provided that the assignor retained the proceeds of any collateral but the assignee was entitled to any payments on the note made following assignment. The Court adopted the majority position that, absent special circumstances, a loan participation is a complete transfer of an ownership interest in the loan and collateral to the participant, rather than a loan from the participating bank to the lead bank. Therefore, the participant/assignor had a percentage ownership interest in the collateral and did not pass that interest by assignment. The court refused to try to characterize the participant's interest as "legal" or "equitable," cotenancy or otherwise. It just said that the interest was there.

Note: The court allows for the fact that transactions in which the participation operates as a "disguised loan" to the lead bank may be characterized differently, such as where the participant receives some guarantee of return prior to the lead lender. See S.O.A.W. Enter. Inc., 32 B.R. 279, 282 (Bankr. W.D. Tex. 1983) (Arrangement where "participant" got 100% of all borrower's payments to "lead" until participant's "share" was repaid constitute a loan from participant to lead, not a participation.)

Comment: The collateral at issue here was resold by the lead lender for over $600,000. Even though the RTC included the loan in a "package" of assigned loans, one would assume that the parties must have made some computations as to the value of the assigned assets that would have reflected how much the parties valued this loan, and that computation should have provided some guidance as to what the parties intended.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. Contact Shawn Kaminsky at the ABA. (312) 988 5260. Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items reported in the Daily Development and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Items in the Daily Development are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.