Courts may properly register summary judgment for breach of a participation agreement against a participating bank that does not meet the standards of gross negligence of the participation agreement. Although summary assessment procedures are generally applied with caution in the case of negligence, summary judgment is appropriate when the lead bank highlights the lack of evidence of violation of the contractual rights of the participant subjected to a typical standard of grossness established in the participation contracts. See Sperry Associates Federal Credit Union v. Space Coast, 877 F. Supp. 2d 1227 (M.D. Fla. 2012). In Sperry, a participant filed a complaint against the credit bank for violating the credit participation contract, fraud, misrepresentation and incitement fraud. Both parties sought summary judgment. Id.
The clear terms of the participation agreement limited the responsibility of the lead bank to acts constituting “intentional misconduct or gross negligence.” Id. to 1236. In practical terms, the participation agreement provided that while the idea of transferring the credit participation process to third parties can be very attractive, lenders should be aware of what it is all about from start to finish. Before buying a loan, acquiring a stake or signing a third-party contract, financial institutions would be encouraged to take into account the following: therefore, the establishment of exclusions and submissions in the participation contract with respect to the availability of all relevant documents and the assessment of the borrower`s creditworthiness can be a very effective instrument to prevent allegations of dependence on representation or incentives towards the major banks. The agreement should specify that (1) the participant has access to all the information necessary to make his decision to acquire a stake; (2) the participant independently verified all relevant documents requested by the management bank; 3. The leading bank does not provide assurance as to the ability to recover, sustainability or adequacy of security; and (4), the participant acknowledges that he did not rely on the first bank to examine or assess the risks, but that he made his decision solely on the basis of his own independent assessment of the loan and the value and collateral status of the collateral that insure the loan. In summary, the agreement should reflect the fact that the participant entered into the participation agreement with all the necessary information, as if he had taken out the loan himself. However, the major banks should endeavour to provide participants with all the relevant information that the borrower receives and, in the form it receives, in order to assist the participant in fulfilling his obligation to carry out his own independent credit analysis of the borrower. This obligation is in line with the rules and guidelines adopted by bank regulators. However, the parties are not always able to agree on the best course of action with respect to important administrative decisions regarding loan participation.
In cases where there are only two parts – a lead and a participant – this can lead to a deadlock. For this reason, a participation agreement should always include a repurchase provision, as the leading bank may decide to acquire the participant`s shares in the loan.