Article

Note: Bank of America National Association, the Lead Bank, sold LaSalle Bank National Association, the Participant Bank, a 40% participation facility in some, but not all, of the loans extended by Lead Bank to a toy manufacturer and distributor, Trendmasters, Inc. One of the ancillary loans not subject to the participation facility was capped at the time Participant Bank purchased the facility; the loan cap was the lesser of US$2.5 million, or 45% of outstanding LCs issued by Lead Bank naming the toy company as beneficiary.

Subsequent to signing the participation agreement, Lead Bank made additional ancillary loans to the toy company, exceeding both the aforementioned cap and the 45% advance rate. The additional ancillary loans were made without Participant Bank's consent and without written amendment to the loan agreement between Lead Bank and the toy company. Subsequently, the toy company defaulted on all of its loans and Lead Bank liquidated the toy company's assets to offset outstanding loan amounts; none of the recovered collateral was assigned to the loans subject to Participant Bank's facility agreement.

As a result, Participant Bank sued Lead Bank for reimbursement under the participation facility, asserting a number of counts including breach of contract, breach of fiduciary duty, gross negligence, and misrepresentation. Lead Bank moved to dismiss portions of the complaint.

Judge Gettleman of the U.S. District Court for the Northern District of Illinois, applying Missouri law, granted Lead Bank's motion in part, and directed Participant Bank to file an amended complaint addressing the separate breach of contract claim not attacked in the motion to dismiss, as well as the alleged wrongful delay in declaring the toy company in default.

Participant Bank based its breach of contract, breach of fiduciary duty and gross negligence claims on Lead Bank's unilateral increase of its ancillary loan amounts to the toy company without notifying Participant Bank, allegedly causing the toy company's default. The trial court dismissed these claims because the terms of the facility specifically "negate[d] any claim by [Participant Bank] that under [the participation facility] it had a right to vote on any amendment to the [ancillary loans]."

However, the court found the allegation that Lead Bank wrongfully delayed its declaration of the toy company's default in attempt to avoid the terms of the participation agreement stated a sufficient claim to proceed, because the participation agreement specifically provided for set-off procedures in the event of default. These procedures were not activated due to the time lapse between the apparent default and the declared default. The court dismissed the claim based on a breach of fiduciary duty, however, because the participation agreement expressly disclaimed any duties other than those set forth in the agreement.

[JEB/fkd]

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