APPELLATE COURT OF ILLINOIS, FIFTH DISTRICT
525 N.E.2d 217, 170 Ill. App. 3d 898, 121 Ill. Dec. 411 1988.IL.920
Appeal from the Circuit Court of St. Clair County; the Hon. Stephen Kernan, Judge, presiding.
JUSTICE WELCH delivered the opinion of the court. HARRISON, P.J., and KARNS, J., concur.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WELCH
This is an appeal from two orders entered in the circuit court of St. Clair County, the first of which dismissed First National Bank of Belleville as a party plaintiff in the underlying complaint, and the second of which denied their petition to intervene in the ongoing action of the First National Bank of Red Bud, previously a co-plaintiff in the underlying action.
First National Bank of Belleville and First National Bank of Red Bud (Bank of Red Bud) filed a complaint on March 12, 1985, seeking recovery for conversion by the defendants of collateral which had been pledged to secure a loan in the amount of $650,000, loaned to Wayne Seibert by Bank of Red Bud on February 16, 1981. This pledge of collateral to secure the loan was documented in a collateral promissory note from Wayne Seibert to Bank of Red Bud entered into on February 16, 1981, and renewed on October 30, 1981. Bank of Red Bud recorded a financing statement in the recorder of deeds office in Monroe County, Illinois, on February 23, 1981. The sale from Wayne Seibert to the defendants of hogs which were part of the collateral securing the $650,000 loan prompted the underlying action.
First National Bank of Belleville's alleged interest in the above-stated lawsuit arose out of a participation agreement entered into by the Bank of Red Bud and the First National Bank of Belleville whereby Bank of Red Bud sold to First National Bank of Belleville a $450,000 share of the $650,000 Wayne Seibert loan. At no time did First National Bank of Belleville negotiate with or otherwise deal directly with Wayne Seibert or any of the defendants regarding the loan or collateral. The rights of First National Bank of Belleville, as a participant bank, were set out in the participation conditions attached to the participation agreement. These participation conditions reserved to the Bank of Red Bud, as the issuing bank, all loan servicing decisions and required that Bank of Red Bud "use the same degree of care and diligence that a bank would be expected to use in servicing a loan made on its own account; and if, having used such degree of diligence, a loss should occur, the Issuing Bank will not be responsible therefor."
The contentions presented by First National Bank of Belleville on appeal are essentially two: (1) that the trial court erred in dismissing First National Bank of Belleville's complaint for failure to state a cause of action, and (2) that the trial court erred in denying First National Bank of Belleville's petition to intervene in the ongoing action of Bank of Red Bud. In neither of these contentions do we find merit.
The first order appealed from granted defendants' motion to dismiss under section 2-615 of the Code of Civil Procedure (Ill. Rev. Stat. 1985, ch. 110, par. 2-615), for failure to state a cause of action. A motion to dismiss under section 2-615 tests only the legal sufficiency of the complaint (Interway Inc. v. Alagna (1980), 85 Ill. App. 3d 1094, 407 N.E.2d 615) and preserves for review only the legal sufficiency of the complaint. Payne v. Mill Race Inn (1987), 152 Ill. App. 3d 269, 504 N.E.2d 193.
In the present case, First National Bank of Belleville alleged in its complaint that it had an interest in the promissory note and collateral securing the $650,000 loan to Wayne Seibert. This interest, First National Bank of Belleville alleged, arose by virtue of the fact that First National Bank of Belleville had become a participant in the loan. Therefore, according to First National Bank of Belleville, its action against the defendants for conversion of collateral securing the loan should not have been dismissed.
Whether the First National Bank of Belleville's complaint was properly dismissed requires a determination of whether an interest in the collateral securing a loan automatically inures to a participant bank, and whether a participant bank has a right of action under the participation agreement against anyone other than the lead bank. While we are aware of no Illinois case dealing with the interests of a participant bank in the collateral securing a loan in which the bank has become a participant, we find guidance in articles published in periodicals and in opinions of courts in other jurisdictions. See e.g., Simpson, Loan Participations: Pitfalls for Participants, 31 Bus. Law. 1977 (1976); Armstrong, The Developing Law of Participation Agreements, 23 Bus. Law. 689 (1968); Ledwidge, Loan Participations Among Commercial Banks, 51 Tenn. L. Rev. 519 (1984); In re Yale Express System, Inc. (S.D.N.Y. 1965), 245 F. Supp. 790; First State Bank v. Towboat Chippewa (N.D. Ill. 1975), 402 F. Supp. 27; Franklin v. Commissioner of Internal Revenue (5th Cir. 1982), 683 F.2d 125.
Alan W. Armstrong in The Developing Law of Participation Agreements, 23 Bus. Law. 689 (1968), states that "[a] true participation is a shared loan, an undertaking by one financial institution, usually called the 'lead,' to divide a large loan which it has or will put on its books into shares which it then offers for sale to other 'participant' financial institutions." (23 Bus. Law. at 689.) There are several practical reasons for participation agreements. According to David B. Simpson, in Loan Participations : Pitfalls for Participants, 31 Bus. Law. 1977 (1976), by selling participations financial institutions commonly seek to satisfy dual objectives of improving their liquidity and diversifying their risk. (31 Bus. Law. at 1977.) A situation appropriate for participation agreements arises when a borrower requests a loan in excess of the statutory ceiling on the amount that a lending institution may loan to any one borrower. Similarly, smaller banks may not be able to satisfy single-handedly a loan request for a substantial amount of money. In these situations a participation agreement is an expedient device whereby two or more lenders may pool their financial resources to provide the amount requested. See generally Ledwidge, Loan Participations Among Commercial Banks, 51 Tenn. L. Rev. 519, 521-23 (1984) (discussing practical reasons for use of participation agreements); see also Hutchins, What Exactly is a Loan Participation ?, 9 Rut.-Cam. L.J. 447, 448-58 (1978), (covering the development of loan participations).
Alternatively, for purposes of maintaining good business relations with more than one bank, a borrower may insist that its loan be shared by several of its customary banks. Or, a bank may actively seek to become a participant to further its own interest in lending funds at terms and rates more favorable than those available to it through its own marketing efforts. These and other factors, singly and in combination, have resulted in the increasing popularity of interbank ...