Central Bank and Real Estate Owned v. Hogan

Liberty Bank (Liberty) (defendant) issued a loan that was secured by the debtor’s real property and personal property. Liberty entered into participation agreements with five other banks (participants) (defendants) to share the loan’s costs and benefits. Under this deal, Liberty would be the lead bank with an approximately 59 percent interest in the loan, and the participants would hold a roughly 41 percent interest. Among other things, the participation agreements said that (1) Liberty was selling and the participants were purchasing a participation interest in the loan, (2) Liberty would hold the loan documents in trust for the participants, and (3) if the debtor defaulted, Liberty’s and the participants’ interests in the loan and any of the security for the loan would remain proportionate to their ownership percentages. The debtor defaulted and voluntarily gave Liberty the property that had secured the loan. However, Liberty encountered financial problems and dissolved. As part of the dissolution, Liberty sold its interest in the property to Central Bank and Real Estate Owned, LLC (Central Bank) (plaintiff) using a quitclaim deed. Central Bank brought a declaratory-judgment action against Liberty’s trustee (defendant) and the participants, seeking a declaration that Central Bank owned the entire property in fee simple because the participants had owned only 41 percent of the loan and did not have any ownership in the collateral that had secured the loan. The district court ruled that the participation deal gave the participants an ownership interest in the loan and the security and, therefore, that the quitclaim deed had transferred only Liberty’s 59 percent interest in the property. Central Bank appealed.