First Nat. Bank of Louisville v. Continental Illinois Nat. Bank and Trust Co. of Chicago

• Citation: 933 F.2d 466
• Decision Date: 20 May 1991
• Docket Number: No. 90-2494,90-2494
• Parties: FIRST NATIONAL BANK OF LOUISVILLE, Plaintiff-Appellant, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 466

933 F.2d 466

19 Fed.R.Serv.3d 977

FIRST NATIONAL BANK OF LOUISVILLE, Plaintiff-Appellant, v. CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF

CHICAGO, Defendant-Appellee.

No. 90-2494.

United States Court of Appeals, Seventh Circuit.

Argued April 17, 1991.

Decided May 20, 1991.

Ronald Butler, Ellen M. Babbitt, Bruce W. Melton, Butler, Rubin, Newcomer, Saltarelli, Boyd & Krasnow, Chicago, Ill., Patrick E. Morgan, Douglas G. Sharp, Carolyn B. Wetterer, Morgan & Pottinger, Louisville, Ky., for plaintiff-appellant.

Francis X. Grossi, Jr., C. Elizabeth McCarty, Lori Richardson, Katten, Muchin & Zavis, Chicago, Ill., Edward H. Stopher, Louisville, Ky., for defendant-appellee.

Before BAUER, Chief Judge, and WOOD, Jr., and POSNER, Circuit Judges.

POSNER, Circuit Judge.

This is a contract dispute between two banks that participated in a joint lending arrangement of the kind known as a "participation agreement." (It is in federal court under the diversity jurisdiction, and Illinois law governs the substantive issues by virtue of a choice of law clause in the contract.) In a typical such arrangement, one bank--the "lead bank"--first makes the loan agreement with the borrower and then makes a separate agreement--the participation agreement--with other banks, to which the lead bank sells shares in the loan (usually retaining a share for itself, however), evidenced by participation certificates. The result is that only the lead bank has a direct contractual relationship with the borrower. Jeffrey Hutchins, What Exactly Is a Loan Participation?, 9 Rutgers Camden L.J. 447 (1978); Patrick Ledwidge, Loan Participations Among Commercial Banks, 51 Tenn.L.Rev. 519, 528 (1984). (On the interpretation of conventional participation agreements, see Carondelet Savings & Loan Ass'n v. Citizens Savings & Loan Ass'n, 604 F.2d 464 (7th Cir.1979); First Bank of Wakeeney v. Peoples State Bank, 12 Kan.App.2d 788, 758 P.2d 236 (1988).) The deal in this case was different because all the banks signed the loan agreement with the borrower and the borrower issued a separate promissory note to each of the banks. A separate agreement, this one just among the banks, appoints one of the lenders to act as agent for the rest in disbursing the loan moneys to the borrower and distributing payments on the loan to the banks, supervising the borrower's use of the assets that are the collateral for the loan, and, in short, administering the loan. The agent bank corresponds to the lead bank in a conventional participation deal. For simplicity's sake we shall ignore the separate documents and pretend that the agreement among the banks--the participation agreement properly so-called--was part of the loan agreement.

Five banks were involved in the deal, including First National Bank of Louisville, the plaintiff in this case, and Continental Illinois Bank and Trust Company of Chicago (since renamed Continental Bank, N.A.), the defendant. In 1987 the five banks agreed to lend $60 million to Prime Leasing, Inc., a computer leasing firm. First National's share was $10 million. Continental's share--the largest--was $20 million. The loan agreement appointed Continental the agent for the banks. The loan was secured by Prime's assets, consisting mainly of accounts receivable and of computer equipment. This was "revolving asset" collateral. That is, Prime was allowed to continue making leases and sales in the ordinary course of business. The expectation was that if it leased a piece of equipment, this would not reduce, but merely change the form of, the company's assets--would merely change a physical asset into an account receivable. The loan, as a revolving-asset loan (an important qualification, as we are about to see), was for only one year. But it could be extended on a year-to-year basis if all the banks agreed. If not extended, the loan would not become due immediately. The agreement designated November 12, 1988, its first anniversary, not as the due date but as the "conversion date," meaning that if the loan had not been extended by then, the unpaid principal remaining in the revolving-credit account at the end of the year would be converted to a nonrevolving three-year loan. Prime issued a promissory note, due upon conversion, to each of the banks; but upon conversion the banks would be entitled not to cash but only to new notes, promising repayment of the principal over three years.

In June 1988 Prime defaulted on the loan. The agreement provided that in the event of default, Continental could, at the request of a majority of the banks, call the loan, whereupon the promissory notes that Prime had executed would become due and payable immediately--not just replaceable by term notes. The majority did not make any such request, so the loan continued. The agreement also provided that if Prime defaulted, it would lose its right to dispose of collateral. But Continental--over First National's protests--exercised its right as agent to release collateral from the freeze that had descended when Prime defaulted, and also to subordinate collateral to the claims of other lenders (that is, lenders outside of the group of participating banks) where necessary to enable Prime to obtain needed goods or services.

The November conversion date was approaching. Continental didn't want the loan to be converted to a term loan. Probably it didn't want to give Prime that much time to pay back the loan; also there was some possibility that Prime would be sold soon and the loan would then be repaid in full. At the same time Continental didn't want to precipitate Prime into bankruptcy by making the loan payable immediately, as it could have done by declaring a default (provided a majority of the banks went along). So it decided that the original loan agreement should be amended. Of course it could not amend the agreement unilaterally, so it drafted an amendment with a space for each bank to sign, and, in September, all but one--First National--signed. The amendment purported to do two things: to waive Prime's default, and to eliminate the conversion date.

November 12, 1988, came and went. First National took no action to enforce its note. Instead, in May 1989, it filed this suit against Continental, claiming that Continental, in collusion with the other participating banks (not named as defendants, however), had violated the terms of the agency created by the loan agreement.

Finding no breach of contract by Continental, the judge granted summary judgment for Continental and dismissed the suit. Only then did First National move to amend its complaint to add Prime as a defendant. The district judge refused to allow so belated an amendment. Her refusal was not an abuse of discretion. Judgment had been entered. Since First National wanted the judgment altered, it had to persuade the judge to reopen the case--had therefore to file a post-judgment motion under Fed.R.Civ.P. 59(e) or 60(b). Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1111 (7th Cir.1984); Scott v. Schmidt, 773 F.2d 160, 163 (7th Cir.1985). First National did this. But the presumption in favor of liberality in granting motions to amend, Fed.R.Civ.P. 15(a), is reversed after judgment has been entered. 6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure Sec. 1489 (2d ed. 1990). (Unless the purpose of the amendment is merely to conform the pleadings to the proof, Fed.R.Civ.P. 15(b), so that the pleadings will be more informative should either party plead res judicata or collateral estoppel in a subsequent suit. Since...