## Facts

- Liberty Bank, F.S.B. made five loans (2008–2009) to Iowa Great Lakes Holding, L.L.C., secured by real and personal property associated with a hotel known as The Inn at Okoboji.
- Liberty entered loan participation agreements with five participating banks, retaining an undivided 59.48% interest and selling an undivided 40.52% interest to the participants.
- The borrower defaulted; the collateral was transferred to Liberty through a voluntary surrender and an alternative nonjudicial foreclosure under Iowa Code § 654.18 (2014), which extinguished the mortgage.
- Liberty and the participating banks arranged for continued operation of the hotel, with proceeds placed in a segregated account reflecting the parties’ pro rata interests.
- Central Bank acquired certain Liberty assets and, via quitclaim deed, received a conveyance of the hotel real estate to a Central Bank–affiliated entity.
- Central Bank sued for declaratory judgment, claiming fee simple ownership free and clear of the participating banks’ interests and asserting no obligations under the participation agreements.
- The district court granted summary judgment for the trustee of Liberty’s liquidating trust and the participating banks, concluding the participants held ownership interests in the loan and collateral and that Central Bank received only Liberty’s undivided share.

## Issues

1. Whether the participation agreements granted the participating banks a present, undivided ownership interest in the loan and its collateral, or only a contractual right to receive proceeds from Liberty.
2. If the participants held interests in the collateral, whether those interests were perfected and had priority over Central Bank’s derivative claim through Liberty.

## Decision

- The Iowa Supreme Court affirmed summary judgment for the trustee and the participating banks.
- The court held the participation agreements conveyed to the participants a present, undivided ownership/security interest in the loan and underlying collateral, not merely a right to payment from Liberty.
- The court held the participants’ interests were properly perfected under U.C.C. Article 9.
- Because Central Bank’s claim was derivative of Liberty’s, the quitclaim deed could convey no more than Liberty’s 59.48% undivided interest; the remaining undivided interest remained with the participants.

## Legal Principles

- A loan participation agreement may be structured as a “true participation” that transfers to participants a present, undivided ownership interest in the loan and its security, rather than creating only a contractual claim against the lead bank.
- Contract terms indicating a sale of participation, “undivided” percentage interests, the lead bank’s duty to hold loan documents in trust, and proportional sharing of collateral upon default support characterization of participants as co-owners of the loan and collateral.
- Under U.C.C. Article 9, participants’ security interests in loan collateral can be perfected, making those interests enforceable and prior to later transferees who take only the lead bank’s remaining interest.
- A transferee by quitclaim deed takes only the grantor’s interest; if the grantor previously conveyed undivided interests in the secured transaction and collateral, the transferee cannot obtain fee simple free of those interests.

## Conclusion

The court held the participation agreements created co-ownership interests in the loan and collateral that were perfected under Article 9, so Central Bank—claiming solely through Liberty—could not acquire the hotel property free and clear and took only Liberty’s undivided share.


Central Bank & Real Estate Owned, L.L.C. v. Hogan, 891 N.W.2d 197 (Iowa 2017)