Southern Case Summary-Sentinel Capital Orlando, LLC v. Centennial Bank, 676 Fed. App’x 910 (11 Cir. 2017).

An originating bank’s failure to disclose a borrower’s post-default settlement offer or third-party purchase offers to a participating bank and the originating bank’s rejection of the participating bank’s demand to charge interest at a default rate did not breach the originating bank’s obligation under a loan participation agreement to consult with and obtain the written consent of the participating bank prior to any modification, amendment or termination of any material terms in the loan documentsSentinel Capital Orlando, LLC v. Centennial Bank, 676 Fed. App’x 910 (11 Cir. 2017).

 Predecessors-in-interest to the originating bank and the participating lender entered into a loan participation agreement related to a development loan for a residential community with the initial participating bank holding a majority interest in the loan’s principal.  After the borrower’s payment default and before the current participating lender acquired its interest in the loan participation agreement, the current originating bank initiated a foreclosure action on the loan, the borrower and guarantors presented a settlement offer to the originating bank that was rejected, and the originating bank received third party offers to purchase the loan or the property securing the loan.  Subsequent to the current participating lender becoming a party to the loan participation agreement, the originating bank was a party to a mediation session with the borrower and the guarantors as part of the foreclosure action in which settlement offers were rejected.  Additionally, the borrower offered a deed in lieu of foreclosure, and the originating bank received another third party offer to purchase the loan.  Both of these offers were rejected.  The originating bank did not provide notice of any of the settlement offers in mediation, the deed in lieu of foreclosure, or third party offer to the participating lender.  On several occasions, the participating lender provided notice to the originating bank that loan documents allowed, upon the occurrence of a default, a default interest rate to be charged at the lender’s discretion.  The originating bank, the borrower, and the guarantors settled the foreclosure action with a stipulated judgment for a high-bid sale of the property and a deficiency judgment against the borrower and the guarantors.  The deficiency judgment was not collectible.

 The current participating lender filed suit in Florida state court asserted breach of contract claims under the loan participation agreement.  The participating lender alleged that the originating lender defaulted on its obligation to the participating lender through the failure to disclose workout options and to charge default interest and that these defaults triggered a repurchase option under the agreement.  The case was removed to the U.S. District Court for the Middle District of Florida.  On appeal from a judgment in favor of the originating bank, the Eleventh Circuit upheld the lower’s court decision that the participating lender failed to establish that the originating bank defaulted under the terms of the loan participation agreement and that the participating lender cannot invoke the repurchase option.  While the loan participation agreement did not define a “default” for purposes of invoking the repurchase option, Georgia law construes a contract as a whole when determining the meaning of any one part.  The Court held that the originating bank used reasonable judgement and did not default on its contractual obligations to the participating lender when it did not disclose the borrower’s settlement offers and the third-party purchase offers to the participating lender.  The Court noted that participating lender purchased its interest in the loan when it was already distressed and knew the risks when it made its investment decision.  The Court held that the originating bank did not breach its obligations to the participating lender when it disregarded the participating lender’s request to impose the default interest rate.  Under the loan documents only the originating bank and not the participating lender had the discretion to impose the default interest rate.  The originating bank’s use of its discretion with respect to the default interest rate was not a modification, amendment, or termination of the material terms of the loan documents that would require the participating lender’s consent under the loan participation agreement.