## Facts

- Fairfield Financial Services, Inc. originated a $21,840,000 construction loan to Acquilus III, LLC for a Florida condominium project; the borrower’s owner, Herbert Lee Underwood, personally guaranteed the loan.
- Fairfield sold participation interests to other banks, including Sun American Bank’s predecessor, which entered a Participation Agreement to fund 16.056% of the loan up to $3,500,000 while Fairfield acted as lead lender/servicer.
- The Participation Agreement required Fairfield to provide specified information and disclose material adverse changes in the borrower’s financial condition, including credit-related developments, and included a repurchase remedy if Fairfield materially defaulted on its duties.
- During 2007, as market conditions worsened, Fairfield internally downgraded the construction loan’s credit rating three times due to the borrower’s declining liquidity.
- Fairfield did not timely disclose these internal downgrades to the participant, yet continued requesting and accepting the participant’s proportional funding of loan draws through April 9, 2008.
- On April 21, 2008, Sun American first learned of the 2007 internal downgrades; on May 15, 2008, it declared Fairfield in material default and demanded repurchase under the agreement.
- Fairfield refused to repurchase; Sun American sued for breach of the disclosure duties and enforcement of the repurchase clause, and Fairfield counterclaimed that Sun American breached by stopping funding in April 2008.
- The court decided cross-motions for summary judgment.

## Issues

1. Whether Fairfield breached the Participation Agreement by failing to timely disclose material adverse information, including internal credit-rating downgrades reflecting the borrower’s deteriorating liquidity.
2. Whether Fairfield’s nondisclosure constituted a material default triggering the agreement’s repurchase clause.
3. Whether Sun American breached the Participation Agreement by ceasing to fund its share of draws after learning of the undisclosed downgrades, such that Fairfield could recover on its counterclaim.
4. Whether any genuine dispute of material fact precluded summary judgment.

## Decision

- The court granted Sun American’s motion for summary judgment and denied Fairfield’s motion.
- The court held Fairfield breached its contractual disclosure obligations by failing to disclose the internal downgrades and related adverse borrower information.
- The court held the breach was a material default that triggered Sun American’s contractual right to require Fairfield to repurchase the participation interest.
- The court rejected Fairfield’s counterclaim, concluding Sun American’s funding cessation followed Fairfield’s prior material breach and was consistent with Sun American’s contractual repurchase remedy.
- The court directed the parties to confer and submit a stipulation of damages within 20 days.

## Legal Principles

- Participation agreements are enforced according to their text, including provisions allocating monitoring and disclosure responsibilities to the lead lender.
- Where an agreement requires disclosure of material adverse changes, a lead lender’s undisclosed internal credit downgrades and borrower liquidity deterioration can constitute breach when they reflect a significant increase in loan risk.
- A repurchase clause tied to the lead lender’s material default is enforceable; nondisclosure that deprives the participant of timely risk information can qualify as a material default triggering repurchase.
- Under prior material breach principles and contractually specified remedies, a participant’s refusal to continue funding may not constitute breach when it occurs after, and in response to, the lead lender’s earlier material default.

## Conclusion

The court held that Fairfield’s failure to timely disclose repeated internal downgrades and related adverse borrower information breached the Participation Agreement and amounted to a material default, entitling Sun American to enforce the repurchase remedy; Sun American’s later decision to stop funding did not support Fairfield’s counterclaim.


Sun Am. Bank v. Fairfield Fin. Servs., Inc., 690 F. Supp. 2d 1342 (M.D. Ga. 2010)