Georgia Court of Appeals Affirms Interlocutory Injunction - CRE v. First Citizens Bank of Georgia

Banks which have been assigned the lead position in a participated loan from the FDIC as Receiver for a failed bank have traditionally relied upon 12 U.S.C. § 1821(e)(13) to protect against ipso facto clauses which would otherwise allow a participant to remove the lead bank and assume administration of the loan. These ipso facto clauses typically allow removal of the lead bank if it “is declared insolvent, is taken over, or otherwise closed by a governmental regulatory agency…”. Section 1821(e)(13) sets forth the FDIC’s authority to enforce contracts, such as Participation Agreements, entered into by depository institutions prior to their failure and provides that the “conservator or receiver may enforce any contract . . . entered into by the depository institution notwithstanding any provision of the contract providing for termination, default, acceleration, or exercise of rights upon, or solely by reason of, insolvency or the appointment of or the exercise of rights or powers by a conservator or receiver.” 12 U.S.C. § 1821(e)(13)(A) (emphasis added).

On March 12, 2014, the Georgia Court of Appeals, however, affirmed the trial Court’s grant of a 11% minority participant’s request for an interlocutory injunction enjoining a foreclosure sale and finding that there is a substantial likelihood that the minority participant will prevail on the merits and may remove the lead bank as the administer of participated loan based solely upon the closure of a failed bank, thereby upholding the validity of the ipso facto clause contained in the participation agreement. The decision has far reaching ramifications for banks who are parties to participation agreements where the lead bank has failed and the lead position has been assigned by the FDIC.

In CRE Ventures 2011-1, LLC v. First Citizens Bank of Georgia, A13A1888 (Ga. Ct. App. March 12, 2014), CRE Ventures 2011-1 LLC (“CRE”) was the successor in interest to the FDIC as Receiver for Crescent Bank and Trust Company (“CBT”). CBT entered into a Participation Certificate and Agreement (the “Participation Agreement”) with First Citizens Bank of Georgia (“Citizens”) which purchased an 11% interest. There were three (3) additional participants in the loan. CBT retained the majority interest. CBT as the “Seller” was the lead bank and had the right to administer the loan and any related guaranties as though it was the sole owner and holder thereof including acceleration of the loan and foreclosure.

CRE and the other participants, except for Citizens, agreed that foreclosure was the best way to maximize their return. Only Citizens objected, arguing that the best way to recover on the loan was to work with the borrower to improve the property and lease the commercial space, thereby facilitating the borrower’s ability to repay the loan and increase the value of the property. Citizens filed suit against CRE to enjoin the foreclosure and requested a determination that the closure of CBT and the appointment of the FDIC as Receiver was a “Qualifying Event” which allowed Citizens to remove CRE as the successor in interest to the FDIC as Receiver for CBT, as administrator of the loan. Citizens relied upon Section 20(a)(4) of the Participation Agreement which provides, in part, that a participant may notify Seller and assume administration of the loan if: “Seller is declared insolvent, is taken over, or otherwise closed by a governmental regulatory agency which has jurisdiction over Seller …”

The Court of Appeals rejected CRE’s reliance on 12 U.S.C. § 1821(e)(13) and the related case law, and affirmed the trial court’s grant of an interlocutory injunction enjoining the foreclosure. In so doing, the Court found that the record below supported the trial court’s findings that:

1. Citizens will lose some of the value of its investment if CRE is allowed to foreclose;
2. The harm to Citizens from the foreclosure outweighs any harm that an injunction will cause CRE “given that CRE bought CBT’s share of the Loan at a discount;” and
3. Given the plain language of the Agreement, there is a substantial likelihood that Citizens will succeed on the merits for declaratory judgment (i.e.: the closure of CBT is a “Qualifying Event” which allows a minority participant to remove the Administrator and take over administration of the Loan)

The Court of Appeals’ decision allows a minority participant to remove a bank which has been assigned the lead position in a participated loan by the FDIC based solely upon the closure of the failed bank and appointment of the FDIC as Receiver. The implications of the decision are potentially very broad and may allow a minority participant to enjoin a foreclosure, despite the express provisions to the contrary in a Participation Agreement which allow the lead bank to accelerate the Loan and foreclose.