Rights of a Participant Bank Against a Lead Bank in a Participation Loan Agreement

Financial institutions in the US and overseas are more frequently entering into joint ventures designed to provide funds to large corporate clients in cases in which it would be impossible for any single financial institution to supply the necessary amount of funds. These joint ventures are commonly known as "participation loans." If the participation agreement contains words of "sale," "transfer," or "assignment" of a part of the loan to the participant, most courts conclude that the lead bank intended to provide the participant with a partial or fractional interest in the underlying obligation, promissory note, or risk asset received from the borrower. However, if the lead bank has a security interest in the collateral of the borrower that is not perfected pursuant to the Uniform Commercial Code, or the lead bank does not obtain any collateral of the borrower, and the borrower becomes insolvent, the participant may only receive its proportionate share of the amount of funds that the lead bank can obtain from the borrower.