While the comment may suggest that a participation is a sale, which thereby transfers ownership rights in the loan participation to the participant, it is generally recognized that loan participation agreements provide that the agent or lead lender which “sells” the interest will maintain some degree of control of the process. Under the participation, the lead lender frequently retains rights to make judgments, implement remedies and administer the proceedings directly with the borrower; with the participant having little voice in the proceedings. This is different from what the Uniform Commercial Code views as a transfer of “full and complete ownership” via sale of the accounts and other collateral which are at the essence of a secured loan transaction in a participation.12 In other instances, the relationship between the lead and the participant may be viewed as the lead being a trustee for the participant having various duties of disclosure and care that can be avoided with contrary contractual language.13

Effect of the Act

Notwithstanding these various interpretations, it is suggested that the entire characterization of the relationship between agent and participant is really that of a hybrid, with components of a sale accompanied by elements of a retention of some incidents of ownership by the agent. Efforts to classify the relationship are seemingly non-legion suggesting the need to carefully draft for as many of these contingencies as possible. Indeed, the identity and structure of the agent itself can change as some or all of the federal remedies discussed herein are imposed.

The sale or divestiture of an agent or a restriction upon its activities by the Treasury may have a more severe impact on that agent’s performance or prospective performance than a mere breach of a contractual provision. The ownership, equitable structure or management of that agent may be changed in such a way as to impact the expectations of participants. The participant may wish to unwind the transaction or replace the agent as a result. All of these circumstances, in addition to traditional receivership concerns, make drafting considerations important.

The prudent participant will take care to balance the enthusiasm of the parties to fund a lending arrangement against remedies to protect a participant’s expectations should an agent be unable to perform or have its structure or ability to perform affected by implementation of remedies by the secretary.

Failure to perform contractual duties is historically addressed in a participation format by a lender refusing to lend or breaching a performance covenant. This scenario can be expanded to include remedies available when an agent has had its activities curtailed or its existence changed by the implementation of the remedies available to the FDIC or the secretary. The concept of a “defaulted agent” seems particularly appropriate for this purpose.

Already common in participation agreements to effectuate the removal of an agent upon a performance default or other stated grounds, the definition thereof can be expanded to include changes in ownership, restrictions imposed by federal agencies on activities, receivership, or other remedies discussed in this article. A suggested expansion of the definition of “defaulted agent” follows:

“Defaulted Agent” – An agent or funding agent with respect to which any one or more of the following has occurred: (a) agent or funding agent has failed to perform any one or more of its respective duties under the credit agreement or any other agreement with any one or more of the borrower, the guarantor and/or lenders; (b) agent or funding agent has failed to meet any of its respective lending or settlement obligations pursuant to the credit agreement; (c) agent or funding agent has experienced a material adverse occurrence; (d) agent or funding agent has undergone or been subject to a change of control; or (e) agent or funding agent is the subject of any regulatory proceeding or investigation by any state or federal agency having jurisdiction which has the potential consequence of a seizure, receivership or other enforcement action which may impair or restrict the independent judgment or actions of the agent or funding agent, respectively. 14


The occurrence of these circumstances can also be addressed by expanding upon default remedies upon which a lender may be removed by the agreement’s group of agreed upon percentage of the remaining lenders for non-performance or default. These remedies would somewhat alleviate the unhappy consequences of most participation agreements failing to contain an option by a participant to terminate the participation – usually a logical consequence given the borrower’s expectations of its contractual rights to funding. A proposed expanded application of these default remedies follows:

The agent and/or the funding agent may be removed at any time, for cause, by the required lenders. A defaulted agent shall be removed and replaced; provided, however, that if the agent and/or funding agent has become a defaulted agent solely because of a failure to meet a lending or settlement obligation pursuant to the credit agreement, then in such event such agent and/or funding agent shall have failed to cure such failure to meet a lending or settlement obligation pursuant to the credit agreement within three (3) business days after notice has been sent to such agent and/or funding agent in accordance with Section of the credit agreement. Upon removal of the agent and/or the funding agent, the required lenders shall have the right to appoint a successor agent and/or successor funding agent . . . and the removed agent or removed funding agent shall thereupon be deemed discharged from its duties and obligations hereunder; provided, however, that a defaulted agent shall not be discharged from the claims and/or rights of the lenders hereby reserved to assert any and all claims at law or equity against a defaulted agent which arise from the facts and circumstances which caused the agent or funding agent to become a defaulted agent.