UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

COVINGTON DIVISION

 

 

 

 

IN RE:

COVINGTON LANDING LIMITED

PARTNERSHIP

DEBTOR CASE NO. 92-21467

CHAPTER 11

 

 

 

 

COVINGTON LANDING LIMITED

PARTNERSHIP PLAINTIFF

 

VS. ADV. NO. 92-2190

 

THE HUNTINGTON BANK, INC., et al. DEFENDANT

 

 

MEMORANDUM OPINION

 

This matter is before the Court on the Motion to Dismiss for Failure to State a Claim Upon Which Relief Can Be Granted filed herein by defendants Central Trust Company, N.A. and Central Trust, Northern Kentucky, National Association (collectively "Central Trust"). The plaintiff has filed a Response, as has defendant The Huntington Bank, Inc. ("Huntington"). This Court has jurisdiction of this matter pursuant to 28 U.S.C. '1334(b); the plaintiff has asserted that it is a core proceeding pursuant to 28 U.S.C. '157(b)(2).

This matter was initiated by the filing of the plaintiff's Complaint on October 16, 1992. One of the grounds for Central Trust's Motion to Dismiss was that the Complaint failed to state whether or not it was a core proceeding. Huntington filed a Motion to Dismiss on that ground as well on November 13, 1992. The plaintiff was given leave to file an Amended Complaint and did so on December 14, 1992. The plaintiff also filed a Motion for Preliminary Injunction on January 7, 1993. An Order overruling the Motion was entered on January 15, 1993, after a hearing on January 11, 1993.

The plaintiff's Amended Complaint seeks to have the Court enjoin the defendants from further prosecuting or taking any action in any of several actions against principals and guarantors of the plaintiff. The plaintiff contends that to allow the defendants to do so would so distract the principals of the plaintiff as to compromise the plaintiff's ability to reorganize. The plaintiff includes Central Trust among those it seeks to enjoin on the basis of its assertion that Huntington participated a portion of a $5,500,000.00 indebtedness evidenced by a promissory note dated April 19, 1989 to Central Trust. Central Trust's Motion to Dismiss challenges the inclusion of Central Trust as a defendant in this matter.

Central Trust maintains that it has no direct connection with the plaintiff, that it is not a creditor of the plaintiff. Central Trust states it is only in privity with Huntington under a participation agreement to which the plaintiff is not a party. Central Trust states that it is only a party to two of the lawsuits referred to in the plaintiff's Complaint, and "only as a party Defendant brought in by virtue of a separate and independent Mortgage against the subject property, not by virtue of any contractual relationship with the Debtor herein." (Motion to Dismiss).

The plaintiff's Response to the Motion to Dismiss declines to evaluate Central Trust's status as a loan participant and contends instead that Central Trust should not be dismissed until the plaintiff files an amended motion for an injunction and the Court issues an order ruling on whether an injunction against Huntington also covers Central Trust. Whether or not the plaintiff files an amended motion for an injunction (and to date it has not), the question of Central Trust's status as a loan participant with Huntington vis `a vis the plaintiff must be resolved.

The Court has no loan documents before it which might clarify the positions of the various parties. The Court's independent research reveals that the question of whether a loan participant is a creditor of a bankruptcy debtor is a divided one. In his article "Loan Participations and the Borrower's Bankruptcy", 64 American Bankruptcy L.J. 39 (Winter 1990), Bradford Anderson argues for the position that a loan participant, depending on the nature of the participation agreement, may be a creditor of the bankruptcy debtor.

An analysis of the rights of a participating bank in a fund held by a lead or agent bank pursuant to a loan participation agreement is found in In re Drexel Burnham Lambert Group Inc., 113 B.R. 830 (Bkrtcy.S.D.N.Y. 1990). There the court stated:

Participants in a loan participation agreement, even where there is but one single promissory note held by the lead bank in its own name, are recognized as holding partial ownership interests, in the amount of their ratable shares, of a fund received by the lead bank as agent for all the participants, including itself, in collecting the loan. ... The lead bank, by participating the loan, assigns, transfers, and conveys an undivided percentage ownership interest in the collateral for the participated loan to the participant. It holds the funds it collects by way of repayment of the loan for distribution to the participating banks according to their percentage ownership interest. Accordingly, the loan participants are entitled to their shares as beneficiaries of a trust. (Cites omitted).

At pp. 842-843. The division of opinion is in whether the participants' ownership interest extends only to the collection proceeds or to the loan itself. Id, fn. 16.

It appears, therefore, that support exists for the notion that a loan participant is not necessarily a stranger to the bankruptcy debtor. Whether the relationship that exists between the bankruptcy debtor and the loan participant enables the Court to enjoin the participating bank from proceeding with suits outside the context of the bankruptcy case remains to be seen. However, this Court does conclude that dismissal of Central Trust merely because it is a loan participant would be inappropriate at this time. An order overruling Central Trust's Motion will be entered separately.

Dated:

By the Court -

 

 

______________________________

Judge

 

Copies to:

Debtor

Randy D. Shaw, Esq.

Susan J. Hoffman, Esq.

Elizabeth Graham Weber, Esq.