Opinion ID: 1282412
Heading Depth: 1
Heading Rank: 10

Heading: ownership of repayments

Text: As noted in part I, in the first summarized assignment of error the FDIC asserts that the district court mistakenly found the repayments to be the assets of Northern Bank rather than the assets of Fairfield Bank. Relying on the diverse contractual language found in the various participation agreements, the widespread majority of cases holds that the participated loan device results in the sale of the designated percentage of the loan to the participating bank with the lead bank acting as the participant's agent to collect and forward the appropriate repayments and to service the loan. However, the participant does not acquire full legal title to the loan and attendant documents; such title rests in the lead bank. See, generally, McVay v. Western Plains Corp., 823 F.2d 1395 (10th Cir. 1987); Interfirst Bank Abilene v. Federal Deposit Ins., 777 F.2d 1092 (5th Cir.1985); Hibernia Nat. Bank v. Federal Deposit Ins. Corp., 733 F.2d 1403 (10th Cir.1984); Franklin v. C.I.R., 683 F.2d 125 (5th Cir. 1982); Federal Deposit Ins. Corp. v. Mademoiselle of California, 379 F.2d 660 (9th Cir.1967); Chase Manhattan Bank, N.A. v. F.D.I.C., 554 F.Supp. 251 (W.D.Okla.1983); Holcomb State Bank v. FDIC, 180 Ill. App.3d 840, 129 Ill.Dec. 613, 536 N.E.2d 453 (1989); First Bank of WaKeeney v. Peoples State Bank, 12 Kan.App.2d 788, 758 P.2d 236 (1988). As written in Hibernia Nat. Bank v. FDIC, supra, The lead is the only secured party. The `participants' can look solely to the lead for satisfaction of their claims because they are not themselves creditors of the borrowers and cannot assert creditor claims against the borrowers. Id. at 1407. In the final analysis, the terms of the participation agreement govern the relationship between the lead and participating banks. Franklin v. C.I.R., supra . The agreements in this case make clear that Northern Bank advanced the funds in question; that as to Northern Bank each participation was without recourse against Fairfield Bank; that while the notes and attendant documents named Fairfield Bank as the payor, they were executed to secure Northern Bank's interests and Fairfield Bank thus, to the extent of those interests, held the documents for the benefit of Northern Bank; and that Northern Bank was to receive the proceeds in the proportions that the funds it had advanced bore to the total amounts of the loans. That Fairfield Bank held the repayments in constructive trust for Northern Bank is illustrated by State, ex rel. Sorensen v. Farmers State Bank, 121 Neb. 532, 237 N.W. 857 (1931). Therein, the borrower was obligated to the bank on a $4,500 promissory note he executed to discharge and renew an earlier note which, unknown to him, the bank had sold. The bank sold the second note as well, but rather than using the funds so produced to pay off the borrower's earlier note, it used the funds for its own purposes and dissipated them before it was closed and a receiver appointed. The Farmers State court held that under the circumstances, the borrower entrusted the second promissory note to the bank for the sole purpose of discharging the earlier note. Although there was no express written trust, the court held the bank was essentially a constructive trustee, stating: The bank thus became a trustee to pay the original note with the renewal note and to return the former note to the [borrower].... The bank never acquired [the borrower's] title nor a right to use his credit or proceeds or money in the banking business. In equity his converted property was never a bank asset to which depositors had a right to resort for payment of their general deposits. Id. at 534-35, 237 N.W. at 858. As this court has since noted: A constructive trust is imposed when one has acquired legal title to property under such circumstances that he or she may not in good conscience retain the beneficial interest in the property. In such a situation, equity converts the legal titleholder into a trustee holding the title for the benefit of those entitled to the ownership thereof. .... A constructive trust is a relationship, with respect to property, subjecting the person who holds title to the property to an equitable duty to convey it to another on the ground that his acquisition or retention of the property would constitute unjust enrichment. Gottsch v. Bank of Stapleton, 235 Neb. 816, 825-26, 458 N.W.2d 443, 450 (1990). This so-called swollen assets or augmentation of assets doctrine was also applied in the following cases: State, ex rel. Sorensen v. State Bank of Touhy, 122 Neb. 582, 240 N.W. 925 (1932) (granting an obligor on a refinanced note a preferred claim for funds not forwarded to pay off the first note, as in Farmers State ); State, ex rel. Sorensen v. Beemer State Bank, 123 Neb. 231, 242 N.W. 445 (1932) (denying relief where customer had knowledge that the bank used the bonds in question as general assets of the bank); State, ex rel. Sorensen v. Citizens State Bank, 124 Neb. 562, 247 N.W. 345 (1933) (granting a preferred claim for loan repayments received by the failed bank to the assignee of the note). See, also, State, ex rel. Sorensen v. South Omaha State Bank, 129 Neb. 43, 260 N.W. 815 (1935); State, ex rel. Sorensen v. Nebraska State Savings Bank, 128 Neb. 479, 259 N.W. 46 (1935); State, ex rel. Sorensen v. Fidelity State Bank, 127 Neb. 529, 255 N.W. 781 (1934); First Trust Co. v. Exchange Bank, 126 Neb. 856, 254 N.W. 569 (1934); Davis v. Polak, 126 Neb. 640, 254 N.W. 246 (1934); State, ex rel. Sorensen v. Commercial State Bank, 126 Neb. 490, 253 N.W. 647 (1934); State, ex rel. Sorensen v. Dwight State Bank, 126 Neb. 388, 253 N.W. 410 (1934); State, ex rel. Sorensen v. Bank of Otoe, 125 Neb. 383, 250 N.W. 254 (1933); State, ex rel. Sorensen v. Citizens Bank, 124 Neb. 717, 248 N.W. 82 (1933). The FDIC nonetheless argues that State, ex rel. Sorensen v. Nebraska State Savings Bank, 127 Neb. 832, 257 N.W. 64 (1934), controls. We therein held that book entries shifting assets between two related banks, both of which failed, did not serve to augment the funds of the related bank with which the borrower had dealt. However, the situation presented in Nebraska State is quite different from that presented in the case at hand. In Nebraska State, the claimant was unable to show that any of the assets were actually transferred from one bank to the other; rather, the entries were made merely for the purpose of bolstering up the reserve of one of the related banks. Id. at 835, 257 N.W. at 65. Here, Fairfield Bank actually received funds which reduced its deposit liabilities and loan receivables and left an unrealized obligation to Northern Bank. We thus hold that the participation agreement in question effectuated a sale by Fairfield Bank to Northern Bank of all of the first loan and half of the second loan. However, legal title to the promissory notes and related documents remained in Fairfield Bank, who as lead bank acted as an agent for Northern Bank in servicing the loan; as such, Fairfield Bank served merely as a conduit between the Co-op and Northern Bank. As a consequence, the repayments never became assets of Fairfield Bank; it merely held the repayments in constructive trust for the benefit of Northern Bank. Accordingly, the district court correctly determined that the repayments were assets of Northern Bank.