Community First Bank v. First Central Bank McCook

Nebraska Supreme Court Online Library
www.nebraska.gov/apps-courts-epub/
02/25/2022 09:07 AM CST
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Nebraska Supreme Court Advance Sheets
310 Nebraska Reports
COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839Community First Bank, appellant, v. First
Central Bank McCook, appellee.
___ N.W.2d ___
Filed February 4, 2022. No. S-21-143.
1. Summary Judgment: Appeal and Error. An appellate court affirms a
lower court’s grant of summary judgment if the pleadings and admitted
evidence show that there is no genuine issue as to any material facts or
as to the ultimate inferences that may be drawn from the facts and that
the moving party is entitled to judgment as a matter of law.
2. ____: ____. In reviewing a summary judgment, an appellate court views
the evidence in the light most favorable to the party against whom the
judgment was granted, and gives that party the benefit of all reasonable
inferences deducible from the evidence.
3. Summary Judgment: Jurisdiction: Appeal and Error. When review-
ing cross-motions for summary judgment, an appellate court acquires
jurisdiction over both motions and may determine the controversy that
is the subject of those motions; an appellate court may also specify the
issues as to which questions of fact remain and direct further proceed-
ings as the court deems necessary.
4. Contracts. The meaning of a contract and whether a contract is ambig­
uous are questions of law.
5. Judgments: Appeal and Error. On a question of law, an appellate court
is obligated to reach a conclusion independent of the determination
reached by the court below.
6. Loans: Banks and Banking. In a participation, the lead bank generally
collects payments from the borrower and forwards the appropriate por-
tion of payments to the participating bank, and the duty to pay loan par-
ticipants arises when proceeds are derived from the participating loan.
7. Contracts: Loans: Banks and Banking. Participations are not loans;
they are contractual arrangements between a lender and a third party, in
which the third party, or participant, provides funds to the lender. The
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839lender, in turn, uses the funds from the participant to make loans to the
borrower.
8. Banks and Banking: Intent. Factors that indicate that a transaction
is a true participation include (1) money is advanced by a participant
to a lead lender, (2) a participant’s right to repayment only arises when
a lead lender is paid, (3) only the lead lender can seek legal recourse
against the borrower, and (4) the document is evidence of the parties’
true intentions.
9. Loans: Banks and Banking: Interest. Factors that indicate that a pur-
ported participation may in fact be a disguised loan include (1) guaran-
tee of repayment by the lead lender to a participant, (2) participation that
lasts for a shorter or longer term than the underlying obligation, (3) dif-
ferent payment arrangements between the borrower and the lead lender
and the lead lender and the participant, and (4) discrepancy between the
interest rate due on the underlying note and interest rate specified in the
participation.
10. Contracts: Loans: Intent. To determine whether an agreement is a
true participation agreement or a disguised loan, courts first look to the
written agreement to discern the parties’ intent, limiting their inquiry to
the words of the agreement itself so long as the agreement sets forth the
parties’ intent clearly and unambiguously.
11. Contracts: Words and Phrases. A contract is ambiguous when a word,
phrase, or provision in the contract has, or is susceptible of, at least two
reasonable but conflicting interpretations or meanings.
12. Contracts. When the terms of a contract are clear, a court may not
resort to rules of construction, and the terms are to be accorded their
plain and ordinary meaning as an ordinary or reasonable person would
understand them.
13. Contracts: Evidence. A contract found to be ambiguous presents a
question of fact and permits the consideration of extrinsic evidence to
determine the meaning of the contract.
14. Contracts. A contract must receive a reasonable construction and must
be construed as a whole. And, if possible, effect must be given to every
part of a contract.
Appeal from the District Court for Red Willow County:
David W. Urbom, Judge. Reversed and remanded for further
proceedings.
Michael D. Samuelson and Robert B. Reynolds, of Reynolds,
Korth & Samuelson, P.C., L.L.O., for appellant.
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839David W. Pederson, of Pederson Law Office, for appellee.
Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke,
Papik, and Freudenberg, JJ.
Miller-Lerman, J.
NATURE OF CASE
Community First Bank (Community First) appeals the order
of the district court for Red Willow County which over-
ruled Community First’s motion for summary judgment, sus-
tained the motion for summary judgment of First Central Bank
McCook (First Central), and dismissed Community First’s
complaint in which it set forth “causes of action” all based
on a claim for breach of contract. Community First generally
argues that the district court erred when it determined that the
contract between the two banks was a participation agreement
that did not create a debtor-creditor relationship between the
two banks. We conclude that the contract between the parties
is ambig­uous, and we further determine that a genuine issue
of material fact exists regarding the provisions of the contract
between the parties as to whether their contract is a partici-
pation agreement or a loan and that neither party has shown
that it is entitled to judgment as a matter of law. We therefore
reverse the order granting summary judgment in favor of First
Central, and we remand the cause to the district court for fur-
ther proceedings.
STATEMENT OF FACTS
On April 15, 2020, Community First filed a complaint
against First Central in which it set forth causes of action for
breach of contract, breach of implied covenant of good faith
and fair dealing, conversion, unjust enrichment, and declara-
tory judgment. Community First generally alleged that in 2017,
First Central had approached Community First “about provid-
ing [$300,000] in financing.” Community First alleged that it
accepted First Central’s offer and that the parties entered into
a contract dated June 1, 2017, pursuant to which Community
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839First’s interest under the June 2017 contract “matured on
August 1, 2017.” Community First alleged that on four subse-
quent occasions, First Central sought extensions of the matu-
rity date and Community First agreed to the extensions, the
last of which extended the maturity date to December 15,
2018. Community First alleged that it did not agree to any
further extensions and that following the final maturity date, it
requested payment in full from First Central. Community First
alleged that First Central refused to pay what was owed under
the contract and its extensions. As more fully described below,
the contract between the parties consisted of a document enti-
tled “Participation Agreement,” sometimes referred to herein
as “agreement,” into which a June 1, 2017, letter between the
parties is incorporated.
In support of the cause of action for breach of contract,
Community First alleged that First Central had breached
the contract when it refused to provide the funds to which
Community First was “entitled upon maturity” under the con-
tract. In setting forth causes of action for breach of implied
covenant of good faith and fair dealing, conversion, and unjust
enrichment, Community First similarly alleged that First Central
had committed the claimed torts when it refused to pay what
Community First alleged it was owed under the contract.
Community First sought a judicial declaration of its rights
under the 2017 contract and its extensions, including a deter-
mination of when and from whom Community First was
entitled to be repaid its $300,000 plus interest. Community
First also sought a judgment of damages against First Central
for what it allegedly was owed under the 2017 contract and
extensions.
First Central filed an answer in which it admitted that it
and Community First had entered into a contract that it char-
acterized as a “Participation Agreement” on June 1, 2017, and
that the parties had entered into a “subsequent Participation
Agreement” on November 1, 2017, that replaced the June
contract. First Central further admitted that Community First
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839had requested payment in full from First Central and that First
Central had declined the request. However, First Central denied
that it had breached the contract with Community First or
committed any of the torts claimed by Community First. First
Central denied every other allegation in Community First’s
complaint and asserted that “such allegations incorrectly or
inaccurately describe subsequent interactions between” the par-
ties. First Central asserted that Community First’s claims were
without legal basis under the terms of the contract between
the parties.
Both parties moved for summary judgment, asserting that
there was no genuine issue of material fact and that the respec-
tive party was entitled to judgment as a matter of law. The
district court held an evidentiary hearing on the competing
motions for summary judgment on November 23, 2020. At the
hearing, the court received evidence offered by Community
First that included the parties’ filings in this case and the affida-
vit of a Community First officer, which affidavit included vari-
ous attachments. The court also received evidence offered by
First Central that included affidavits of First Central officers.
Community First offered, and the court received, the affida-
vit of Jon Hidy, a branch president and member of the board of
directors of Community First. Hidy attached several documents
to his affidavit and stated that each of the attachments was a
true and correct copy that had been retained by Community
First or had been produced by First Central as part of discovery
in this case.
Among the attachments to Hidy’s affidavit was a docu-
ment titled “Participation Agreement” and executed between
First Central and Community First on June 1, 2017. In the
agreement, First Central was designated as “Originating
Financial Institution” and Community First was designated as
“Participant.” Recitals at the beginning of the agreement stated
that First Central “has made or will make one or more advances”
and “may, from time to time, make additional advances” to
Donald and Norma Klein, designated as “Borrower,” and that
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839Community First “has contributed or will contribute toward
advances made by” First Central to the Kleins. The terms of
the agreement provided, inter alia, as follows: First Central
would sell to Community First “an ownership interest in cer-
tain indebtedness owed by” the Kleins and that Community
First would purchase such interest “without recourse to” First
Central. Such transaction “shall not be construed as creat-
ing a debtor-creditor relationship between” First Central and
Community First. Community First would purchase an undi-
vided interest in the “Shared Obligation,” which was defined
as “[t]he Loan(s) and corresponding security outlined in a
Commitment Letter dated June 1, 2017.” As part of the agree-
ment, Community First represented to First Central, inter alia,
that “[t]he decision to purchase a participation interest in the
Shared Obligation is based solely on [Community First’s] inde-
pendent evaluation of [the Kleins, the Kleins’] creditworthiness
and existing information relating to the lien status of any col-
lateral given to secure the obligation.” The agreement included
signature pages for each of the parties. The signature page for
Community First was signed by an officer on June 1, 2017, and
stated, inter alia, that its “Funding Commitment” was $300,000
and “Maturity Date” was August 1, 2017. The signature page
for First Central was signed by an officer and stated, inter alia,
that its “Funding Commitment” was $561,006.04 and, instead
of August 1, 2017, the “Maturity Date” was December 15,
2030. The June 1, 2017, letter from First Central to Community
First incorporated into the agreement stated that it was written
“to confirm [Community First’s] interest in participating in
the credit facility to [First Central’s] borrower, [the Kleins].”
The letter then set forth “the terms under which [First Central
was] prepared to offer this participation to [Community First].”
Among the terms listed were a loan amount of $861,006.04
and a participation amount of $300,000. The “Purpose” was
listed as “Refinance Existing Debt.” Referring to the length of
time, the “Term” listed in the June 1, 2017, letter was described
as “[y]our commitment shall be until August 1, 2017,” and
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839“Payments” were described as “[a]ll principal and accrued
interest is due on August 1, 2017.” Provisions regarding the
interest rate, servicing fee, and security were also set forth. The
letter concluded, “If the terms and conditions of this letter meet
with your approval, please indicate your acceptance of this
commitment by signing and returning the enclosed copy.” The
letter was signed as being acknowledged and accepted on June
1, 2017, by an officer of Community First.
Documents which indicated extensions of the June 2017
contract were also attached to Hidy’s affidavit. As stated
above, the letter dated June 1, 2017, and the signature page
for Community First that was part of the agreement indicated
a “Maturity Date” of August 1, 2017. Additional documents
attached to Hidy’s affidavit purported to extend the “Maturity
Date” from August 1, 2017, to, respectively, November 1,
2017; February 1, 2018; July 15, 2018; and finally, December
15, 2018.
The document indicating an extension to November 1, 2017,
was a letter from First Central to Community First, which was
virtually identical to the June 1, 2017, letter except that the
“Term” was described as “[y]our commitment shall be until
November 1, 2017,” and “Payments” were described as “[a]ll
principal and accrued interest is due on November 1, 2017.”
Included with the letter was a signature page similar to the sig-
nature page for Community First that was part of the June 2017
agreement except that it listed “Maturity Date” as November
1, 2017. The letter was signed as being acknowledged and
accepted by an officer of Community First, and the attached
signature page was also signed by the officer.
The documents indicating an extension to February 1, 2018,
were a letter dated November 30, 2017, from First Central to
Community First and a participation agreement between First
Central and Community First dated November 30, 2017. As
with the document indicating the earlier extension, the let-
ter and the agreement were virtually identical to the June 1,
2017, letter and the June 2017 agreement. In the November 30
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310 Nebraska Reports
COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839letter, the “Term” was described as “[y]our commitment shall
be until February 1, 2018,” and “Payments” were described as
“[p]rincipal and accrued interest payment due on December
15, 2017.” The letter was signed as being acknowledged and
accepted by a Community First officer. The November 30
agreement was virtually identical to the June 2017 agreement
but the signature page for Community First listed a “Maturity
Date” of February 1, 2018.
The documents indicating an extension to July 15, 2018, were
a letter dated June 29, 2018, from First Central to Community
First and a participation agreement dated June 29, 2018,
between First Central and Community First. The content of the
letter was virtually identical to that of the June 1, 2017, let-
ter except that “Term” was described as “[y]our commitment
shall be until July 15, 2018,” and “Payments” were described
as “[p]rincipal and accrued interest payment due on July 15,
2018.” Also, the content of the agreement was virtually identi-
cal to that of the June 2017 agreement except that the “Shared
Obligation” was defined as “[t]he Loan(s) and correspond-
ing security outlined in a Commitment Letter dated June 29,
2018,” and that the signature page for Community First listed
“Maturity Date” as July 15, 2018. The agreement was executed
by officers of the respective parties on June 29, 2018.
The document indicating the alleged final extension to
December 15, 2018, was a copy of an email chain between
officers of the respective parties. The first email was sent from
an officer of First Central to an officer of Community First at
2:25 p.m. on September 27, 2018, and stated, “If we pay one
year’s interest—$170.76 per day for 360 days would you be
OK extending the note until 12-15-18?” The next email was a
response from the officer of Community First at 2:31 p.m. that
same day and stated, “Yes.” The final email was a reply from
the First Central officer at 2:57 p.m. that same day and stated,
“Done—we’ll send it in the morning.”
In addition to these documents regarding the contract
and extensions between Community First and First Central,
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839Hidy attached three documents obtained from First Central
through discovery. The first document was a copy of a promis-
sory note in the amount of $861,006.04 dated March 30, 2011.
The borrowers were listed as the Kleins, and First Central
was listed as the lender. The promissory note had a matu-
rity date of December 15, 2030, and it was to be paid in 20
annual installments beginning December 15, 2011. The second
document was a participation agreement between First Central
and another bank that was not Community First. The agree-
ment was executed March 30, 2011. The signature pages for
both First Central and the participating bank stated that the
“Maturity Date” was December 15, 2030. The respective signa-
ture pages also stated that the “Funding Commitment” for First
Central was $461,006.04 and that the “Funding Commitment”
for the participating bank was $400,000. The third document
was First Central’s transcript for the Kleins’ promissory note
showing transactions and outstanding balances between March
31, 2011, and March 17, 2020.
In addition to describing the attached documents set forth
above, Hidy stated the following in his affidavit: In 2017,
First Central approached Community First “about providing
[$300,000] in financing.” At the same time the June 2017
contract was entered into, Community First provided $300,000
to First Central. On September 28, 2018, Community First
received $26,249.22 from First Central, but no other funds
had been received from First Central relating to Community
First’s advance of $300,000 and Community First had not
agreed to any further extensions beyond December 15, 2018.
Following that date, Community First requested payment in
full from First Central, and First Central declined the request.
Hidy stated that Community First was owed principal and
accrued interest of $355,217.45 as of October 22, 2020, with
interest continuing to accrue. Hidy concluded his affidavit by
stating that Community First and First Central did not agree
“on whether the $300,000 financing . . . constitutes a loan or
a participation interest” and that First Central asserted that
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839Community First had acquired a participation interest while
Community First contended that the arrangement was a loan
from Community First to First Central.
Three affidavits of officers of First Central were offered by
First Central and, with minor exception for certain paragraphs,
received by the court. Two of the affidavits were by Don Moore,
the president and chief executive officer of First Central.
In his first affidavit, Moore stated that based on his experi-
ence in banking, he was familiar with participations and appli-
cable banking regulations. The form that was the basis for the
participation agreement between First Central and Community
First was regularly used by First Central for participations and
generally provided that the participating bank was being sold
an ownership interest in indebtedness, that such interest was
an undivided interest in the debt of the borrower, that such
sale was without recourse against the originating financial
institution, and that the agreement was not to be construed
as creating a debtor-creditor relationship between the original
financial institution and the participating bank. The reason
participation was sought in this case was that in 2017, First
Central was in the process of refinancing the indebtedness of
the Kleins, and Moore referred to the loan for $861,006.04 that
First Central had made to the Kleins in 2011 with a maturity
date of December 15, 2030. First Central was looking to par-
ticipate portions of the Kleins’ indebtedness in order to keep
First Central within regulatory lending limits. Community First
expressed interest in acquiring a share of the Klein indebted-
ness. Thereafter, First Central and Community First executed
the June 1, 2017, agreement, as well as the letter dated June 1,
2017, and Community First transferred $300,000 “in exchange
for an undivided interest in the Klein loans.” Although Moore
referred to the 2011 loan to the Kleins, he did not refer to
the existence of other loans, if any, to the Kleins or why he
referred to the Klein “loans” in the plural.
Moore also stated that the Kleins experienced difficulties
with respect to the refinancing and that therefore, Community
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839First agreed to certain extensions in order to enable the refi-
nancing to be completed. With each extension, the parties
signed a new participation agreement with the same terms
as the June 1, 2017, agreement. The last such agreement was
executed in June 2018. Thereafter, in July and August, First
Central “discovered some shortage in collateral which was
to serve as security for the Klein indebtedness,” and First
Central “immediately advised [Community First] of the poten-
tial problem with the collateral.” After discovering the collat-
eral shortage, First Central made no additional loan advances
to the Kleins. When the Kleins made an interest payment of
$26,249.22 in September, First Central paid the full amount to
Community First “in an effort to work with [Community First]
in good faith due to the Klein default.” The Kleins filed for
bankruptcy on June 3, 2019, and again on August 13, 2020.
Collection procedures that First Central had initiated after
discovering the collateral shortage were stayed by the Kleins’
bankruptcy filing.
Moore further stated that as a general matter, in circum-
stances such as the present case, a financial institution may
execute a participation agreement with another bank when the
originating bank cannot loan additional funds to a borrower
because to do so would exceed regulatory lending limits. A
participation agreement in such a circumstance must be without
recourse because if the originating institution could be liable to
the participating bank in the event of the borrower’s default,
then the originating institution could be in excess of regula-
tory lending limits. Moore attached to his affidavit a copy of a
statement of policy of Nebraska’s Department of Banking and
Finance to the effect that when a loan is participated in order to
avoid exceeding the originating bank’s legal lending limit, the
originating bank may not place the participation with recourse
or otherwise agree to buy the debt back if the borrower defaults
or otherwise fails to make payment. Moore finally stated that
any attempt to classify the arrangement between First Central
and Community First in this case as a loan “would not only
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839be contrary to the specific terms of the Agreement itself, but it
would convert this into a ‘with recourse’ relationship in viola-
tion of the regulatory lending limits.”
In the admitted portions of his second affidavit, Moore stated
that if the agreement was a loan as claimed by Community
First, then First Central would have been in violation of regula-
tory lending limits and would have been subject to sanctions.
The other exhibit offered by First Central, received by the
court in whole, was the affidavit of an officer of First Central
who stated that he had been personally involved in the agree-
ments with Community First that were the subject of this
action. He generally stated that during his communications
with officers of Community First, none of them had stated or
implied that they believed the participation agreement to be a
loan with recourse or that they understood the contract to cre-
ate a debtor-creditor relationship between the parties.
On January 20, 2021, the district court filed an order ruling
on the competing motions for summary judgment. The court
began its analysis by stating that Community First claimed
that the June 2017 contract created a debtor-creditor relation-
ship between the parties, whereas First Central contended that
the agreement was a participation and not a loan. The court
noted that “there is little law on what constitutes a participation
agreement in Nebraska,” and it cited Nebraska case law which
generally described participation agreements. The court then
cited precedent from another jurisdiction that set forth “factors
that determine whether a participation agreement amount[s] to
the sale of an undivided interest in the total loan package or
creates a debtor-creditor relationship.” The court noted that the
agreement in this case provided, inter alia, that First Central
“‘will sell’” and Community First “‘shall buy’” an “‘undi-
vided interest’” and that First Central was required to hold
Community First’s portion of interest payments “‘in trust’” for
the benefit of Community First. The court particularly noted an
express provision that the agreement “‘shall not be construed
as creating a debtor-creditor relationship.’” The court found
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839that the agreement was a participation and did not create a
debtor-creditor relationship between the parties. The court also
found that there was no genuine issue of material fact and that
First Central was entitled to judgment as a matter of law. The
court therefore sustained First Central’s motion for summary
judgment, overruled Community First’s motion for summary
judgment, and dismissed the complaint.
Community First appeals the order of the district court
which ruled on the parties’ motions for summary judgment and
dismissed Community First’s complaint.
ASSIGNMENTS OF ERROR
Community First claims that the district court erred when
it overruled Community First’s motion for summary judgment
and when it sustained First Central’s motion for summary
judgment.
STANDARDS OF REVIEW
[1,2] An appellate court affirms a lower court’s grant of
summary judgment if the pleadings and admitted evidence
show that there is no genuine issue as to any material facts or
as to the ultimate inferences that may be drawn from the facts
and that the moving party is entitled to judgment as a matter of
law. In re Estate of Lakin, ante p. 271, 965 N.W.2d 365 (2021),
modified on denial of rehearing ante p.389, 966 N.W.2d 268.
In reviewing a summary judgment, an appellate court views the
evidence in the light most favorable to the party against whom
the judgment was granted, and gives that party the benefit of
all reasonable inferences deducible from the evidence. Id.[3] When reviewing cross-motions for summary judgment,
an appellate court acquires jurisdiction over both motions and
may determine the controversy that is the subject of those
motions; an appellate court may also specify the issues as to
which questions of fact remain and direct further proceedings
as the court deems necessary. Id.[4,5] The meaning of a contract and whether a contract is
ambiguous are questions of law. In re Estate of Karmazin,
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839299 Neb. 315, 908 N.W.2d 381 (2018). On a question of law,
an appellate court is obligated to reach a conclusion indepen-
dent of the determination reached by the court below. Id.ANALYSIS
Community First claims that the district court erred when
it sustained First Central’s motion for summary judgment and
when it overruled Community First’s motion for summary
judgment. We have jurisdiction over both cross-motions for
summary judgment, and therefore, we may determine the con-
troversy that is the subject of the motions or we may specify
the issues as to which questions of fact remain and direct fur-
ther proceedings. See In re Estate of Lakin, supra.
As framed by the parties and the district court, the contro-
versy in this case is whether the contract between the parties is
a participation or a loan. The assumption of the parties and the
district court appears to be that if the contract is a participation
agreement, then First Central did not breach the agreement and
it is entitled to judgment in its favor, but if the arrangement is
a loan, then First Central breached the contract when it refused
to pay all principal and interest after the last extended maturity
date of December 15, 2018, and Community First is entitled to
judgment in its favor.
Although the legal distinctions between a participation and
a loan inform our resolution of the cross-motions for sum-
mary judgment, the action brought by Community First hinges
on Community First’s allegation that First Central breached
the contract between the parties. The first cause of action set
forth in Community First’s petition is the allegation that First
Central breached the contract between the parties when it
refused to pay Community First all principal and interest after
the 2018 applicable maturity. Community First set forth addi-
tional causes of action, but those causes of action all hinged on
Community First’s allegation that First Central had breached
the contract. Community First also sought declaratory judg-
ment regarding First Central’s obligations under the contract.
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839Therefore, determining the controversy in this case requires us
to focus on the specific requirements of the contract to which
the parties agreed, that is whether the transaction between the
parties is properly characterized as a participation or as a loan,
in order to determine whether First Central breached the con-
tract. Therefore, jurisprudence regarding the interpretation of
contracts guides our analysis.
Our analysis of the meaning of the contract in this case is
informed by the law regarding participations and, in particu-
lar, the law related to the distinctions between participations
and loans. Following our review of the law pertaining to
the identified distinction, we next review the law governing
interpretation of contracts. We then apply general concepts of
contract law, informed by our understanding of the law relating
to participations and loans, to determine whether the district
court in the context of summary judgment motions properly
determined that the contract was a participation and granted
judgment in favor of First Central, whether Community First
was entitled to judgment as a matter of law, or whether there
remain genuine issues of material fact which preclude entry of
summary judgment.
Law Regarding Participations and Distinguishing
True Participations From Disguised Loans.
Although there are some Nebraska cases discussing partici-
pation agreements, we do not appear to have addressed stan-
dards for determining whether a given arrangement constitutes
a true participation or whether it is instead a disguised loan.
We review Nebraska law generally describing participations,
and we look to precedent from other jurisdictions regarding
standards for distinguishing between participations and loans.
In Northern Bank v. Federal Dep. Ins. Corp., 242 Neb. 591,
593, 599, 496 N.W.2d 459, 461-62, 464 (1993), we described
the following features of participations:
[A] “participated loan” arises under an agreement in
which one bank, known as the lead bank, transfers a
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839loan it has arranged, or a part thereof, to a second bank,
known as the participating bank. The participated loan
device is intended to create in the borrower the illusion
that it is the lead bank which is making the loan. For that
reason it is used whenever the lead bank cannot or does
not wish to lend its own funds, but nonetheless wishes
to keep the borrower as a potential customer for other
banking services. When a participated loan is transferred
without recourse against the lead bank, . . . the participat-
ing bank assumes the credit risk, that is, the risk of the
borrower’s repayment or default.
The lead bank is responsible for gathering and passing
credit information on to the participating bank, for secur-
ing the proper loan documentation, and for collecting the
repayments made by the borrower. The lead bank typi-
cally receives compensation as the result of the “spread,”
that is, the difference between the rate of interest charged
the borrower by the lead bank and the lesser rate of inter-
est the participating bank is to receive.
....
Relying on the diverse contractual language found
in the various participation agreements, the widespread
majority of cases holds that the participated loan device
results in the sale of the designated percentage of the loan
to the participating bank with the lead bank acting as the
participant’s agent to collect and forward the appropriate
repayments and to service the loan.
[6] As stated in Northern Bank v. Federal Dep. Ins. Corp.,
supra, in a participation, the lead bank generally collects pay-
ments from the borrower and forwards the appropriate por-
tion of payments to the participating bank. We recognized in
Central States Resources v. First Nat. Bank, 243 Neb. 538,
545, 501 N.W.2d 271, 276 (1993), that “[t]he duty to pay loan
participants arises when proceeds are derived from the partici-
pating loan.”
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Cite as 310 Neb. 839[7] Other courts have described the following features of
participations. “Participations are not loans; they are contrac-
tual arrangements between a lender and a third party, in which
the third party, or participant, provides funds to the lender. . . .
The lender, in turn, uses the funds from the participant to make
loans to the borrower.” In re ACRO Business Finance Corp.,
357 B.R. 785, 787-88 (D. Minn. 2006) (citing In re: AutoStyle
Plastics, Inc., 269 F.3d 726 (6th Cir. 2001)).
In the typical participation, the lead lender transfers to
the participant not only the benefits to be received from
a share in the underlying loan (i.e. a pro rata share in the
principal and interest payments) but also the risk of the
borrower’s default. The lead lender makes no warranties
or guarantees about the borrower’s ability to repay the
loan or about the worth of the collateral in the event of
default. If the borrower does default, the participant is
entitled to a pro rata share of any monies received upon
liquidation of the collateral, but it has no right of recourse
against the lead lender.
In re Sackman Mortg. Corp., 158 B.R. 926, 932 (S.D.N.Y.
1993).
Although our case law has discussed features of participa-
tions as described above, we do not appear to have addressed
the issue set forth by the parties in this case, that is, how to
distinguish whether a particular arrangement is a participation
or whether it is in fact a loan between banks. As explained
below, courts have recognized that a transaction that purports
to be a participation may be a disguised loan. Courts have gen-
erally developed two tests to determine whether a transaction
is a true participation or whether it is in fact a disguised loan.
We describe the two tests below; they inform our analysis in
this case.
[8] Adhering to the jurisprudential consensus in this area,
the court in In re Corporate Financing, Inc., 221 B.R. 671, 678
(E.D.N.Y. 1998) (internal quotation marks omitted), set forth
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839the following factors that indicate that a transaction is a true
participation:
1) money is advanced by participant to a lead lender;
2) a participant’s right to repayment only arises when a
lead lender is paid;
3) only the lead lender can seek legal recourse against
the borrower; and
4) the document is evidence of the parties’ true
intentions.
[9] The court in In re Corporate Financing, Inc., also set
forth the following factors that indicate that a purported partici-
pation may in fact be a disguised loan:
1) guarantee of repayment by the lead lender to a
participant;
2) participation that lasts for a shorter or longer term
than the underlying obligation;
3) different payment arrangements between the bor-
rower and lead lender and lead lender and participant;
and,
4) discrepancy between the interest rate due on
the underlying note and interest rate specified in the
participation.
221 B.R. at 678-79 (internal quotation marks omitted).
Discussing the factors that indicate that a purported partici-
pation is instead a disguised loan, the court in In re Corporate
Financing, Inc., stated:
The most determinative factor of all of these is the risk
allocation involved in the transaction. If the participant
does not bear the same risk of loss as the seller, or if the
seller has made a guarantee of payment to the participant,
the transaction is generally considered to be a loan and
not a sale . . . .
221 B.R. at 679. Regarding the length of the term of the
arrangement, the court stated that when the purported partici-
pation “has a stated term longer or shorter than the term of the
underlying [indebtedness], this is an indication of a loan and
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Cite as 310 Neb. 839not of a participation.” Id. at 680. See In re Coronet Capital
Co., 142 B.R. 78 (S.D.N.Y 1992).
Another court stated, “Factors which may cause a trans­action
to be other than a true loan participation include anything that
indicates the participants are not subject to the normal risks of
ownership, such as guaranteed returns by the lead institution,
or required repurchase agreements.” McVay v. Western Plains
Corp., 823 F.2d 1395, 1398 (10th Cir. 1987).
[10] Finally, it is important to note that in cases consider-
ing whether an arrangement is a true participation or a dis-
guised loan, courts have stated that to determine whether an
agreement is a true participation agreement or a disguised
loan, courts “first look[] to the written agreement to discern
the parties’ intent, limiting [their] inquiry to the words of the
agreement itself so long as the agreement sets forth the par-
ties’ intent clearly and unambiguously.” In re Sackman Mortg.
Corp., 158 B.R. 926, 932 (S.D.N.Y. 1993).
Contract Law.
The federal courts cited above put the focus on the terms
of the specific agreement between the parties when deter-
mining whether the agreement sets forth a participation or a
loan. We have similarly focused on the words of the parties’
contract. Northern Bank v. Federal Dep. Ins. Corp., 242 Neb.
591, 496 N.W.2d 459 (1993). The causes of action set forth
by Community First hinge on the allegation that First Central
breached the contract between the parties, and therefore, the
determination of whether either party is entitled to judgment as
a matter of law depends on interpretation of the contract and
what is required of First Central under the contract. We ­herefore
review standards applicable to interpretation of contracts.
[11-14] The meaning of a contract and whether a contract
is ambiguous are to be determined by a court as questions of
law. See In re Estate of Karmazin, 299 Neb. 315, 908 N.W.2d
381 (2018). In interpreting a contract, a court must first deter-
mine, as a matter of law, whether the contract is ambiguous.
Bierman v. Benjamin, 305 Neb. 860, 943 N.W.2d 269 (2020).
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839A contract is ambiguous when a word, phrase, or provision
in the contract has, or is susceptible of, at least two reason-
able but conflicting interpretations or meanings. Id. When the
terms of a contract are clear, a court may not resort to rules of
construction, and the terms are to be accorded their plain and
ordinary meaning as an ordinary or reasonable person would
understand them. Id. The fact that the parties have suggested
opposing meanings of a disputed instrument does not necessar-
ily compel the conclusion that the instrument is ambiguous. Id.A contract found to be ambiguous presents a question of fact
and permits the consideration of extrinsic evidence to deter-
mine the meaning of the contract. Id. In addition, a contract
must receive a reasonable construction and must be construed
as a whole. Equestrian Ridge v. Equestrian Ridge Estates II,
308 Neb. 128, 953 N.W.2d 16 (2021). And, if possible, effect
must be given to every part of a contract. Id.Application to Facts of This Case.
We apply the above principles of law regarding contracts
as informed by the jurisprudence regarding participations to
determine if the contract between Community First and First
Central is clear or if there is ambiguity regarding the mean-
ing of the contract. As set forth below, we conclude that there
is ambiguity in the contract caused by the inconsistencies
between the maturity dates stated in the June 1, 2017, letter
and on the signature pages for the respective parties, and that
there is further ambiguity caused by tension between the agree-
ment’s disavowal of the debtor-creditor relationship between
First Central and Community Bank and the lack of recourse
language as compared to the arguable promise of absolute pay-
ment indicated in the June 1, 2017, letter, as well as the lack
of clarity regarding who is paying on August 1, 2017. These
ambiguities create a question of fact regarding what specific
indebtedness is the subject of the contract. Such ambiguity
leads us to consider extrinsic evidence which creates a genuine
issue of material fact regarding whether the specific indebt-
edness is a 2011 promissory note or some other short-term
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Cite as 310 Neb. 839indebtedness of the Kleins to First Central. The ambiguity also
creates an issue whether the contract is a disguised loan and,
if so, what First Central’s obligations were with regard to pay-
ment of principal and accrued interest to Community First on
the stated maturity date. As a result of these genuine issues of
material fact, neither party has shown that it is entitled to judg-
ment as a matter of law.
We note first that the contract between the parties is com-
posed of the June 2017 agreement; the “Commitment Letter
dated June 1, 2017,” which is arguably incorporated by the
“Shared Obligation” provisions of the agreement; and the sev-
eral extensions. The initial “Maturity Date” in the letter was
August 1, 2017, and the extensions included the same relevant
provisions with the exception of the last extended “Maturity
Date.” We focus on the language of the June 2017 arrangement,
including the contents of the letter dated June 1, 2017, to deter-
mine the meaning of the contract between the parties.
The district court in this case determined that the contract
between the parties constituted a participation and not a loan
from Community First to First Central. In reaching this con-
clusion, the court particularly noted certain provisions of the
agreement which showed that the agreement had the typical
features of a participation. We acknowledge that several such
provisions tend to support a determination that the agreement
includes the features of a participation such as those identi-
fied in the legal precedent set forth above. See Northern Bank
v. Federal Dep. Ins. Corp., 242 Neb. 591, 496 N.W.2d 459(1993). See, also, In re Corporate Financing, Inc., 221 B.R.
671 (E.D.N.Y. 1998).
However, the precedent cited above also sets forth fac-
tors that indicate when a purported participation is actually
a disguised loan. See In re Corporate Financing, Inc., supra.Certain factors, such as “different payment arrangements” and
“discrepancy between the interest rate due on the underlying
note and interest rate specified in the participation,” do not
tend to indicate that the agreement in this case is a disguised
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Cite as 310 Neb. 839loan. See id. at 678, 679 (internal quotation marks omitted).
But the remaining factors, such as “guarantee of repayment by
the lead lender to a participant” and especially “participation
that lasts for a shorter or longer term than the underlying obli-
gation,” may be relevant in this case and may indicate that the
transaction between the parties is a disguised loan rather than
a true participation. See id. at 678 (internal quotation marks
omitted).
The June 1, 2017, letter, which is incorporated into the
agreement, states with regard to the underlying obligation that
“[a]ll principal and accrued interest is due on August 1, 2017,”
and the signature page for Community First in the agreement
shows that the “Maturity Date” for Community First’s funding
commitment was also August 1, 2017. This would indicate that
the term of Community First’s participation was the same as
the term of the underlying obligation. But in the agreement,
the signature page for First Central shows a “Maturity Date”
of December 15, 2030, for First Central’s funding obligation.
The December 15, 2030, maturity date for First Central’s fund-
ing obligation creates an ambiguity within the contract regard-
ing the term of the underlying indebtedness. This discrepancy
between maturity dates is problematic.
The term of the underlying obligation and whether there is a
significant difference between the term of the underlying obli-
gation and the term of the contract are factors relevant to con-
sideration of whether a purported participation may instead be
a disguised loan. The term of the underlying obligation in this
case is a material fact because the stated term of Community
First’s participation ends on August 1, 2017 (later extended to
December 15, 2018), and if the term of the underlying obli-
gation in fact ends on December 15, 2030, as stated on the
signature page of the agreement for First Central, then the
term of the participation is significantly shorter than the term
of the underlying obligation. We further observe that the June
1, 2017, letter states that “[a]ll principal and accrued interest
is due on August 1, 2017,” which could suggest a guarantee
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839of repayment to Community Bank, and such guarantee could
be inconsistent with the language of the agreement under
which payments to Community Bank were a function of repay-
ments of advances by the Kleins.
Because there is an ambiguity within the contract, we look
to extrinsic evidence to clarify the meaning of the contract. In
particular, we look to extrinsic evidence which would show
whether the contract provides for participation in indebtedness
with a maturity date of December 31, 2030, or indebtedness
with the much earlier maturity date of August 1, 2017, later
extended to December 15, 2018. The promissory note attached
to Hidy’s affidavit is relevant to this issue. The Kleins’ prom-
issory note was dated March 30, 2011, in the amount of
$861,006.04; the borrowers were the Kleins; and First Central
was the lender. The note was to be paid in 20 annual install-
ments beginning December 15, 2011, and, most significantly,
although the maturity date in the June 1, 2017, letter was 2017
later extended to 2018, the maturity date of the promissory
note was December 15, 2030. The amount of the note and the
borrower listed on the promissory note were the same as those
listed in the June 1, 2017, letter, which explained the “Shared
Obligation” under the agreement, and the maturity date of
the note was the same as the “Maturity Date” listed for First
Central on its signature page of the agreement. This would
indicate the March 30, 2011, promissory note was the under-
lying obligation in which Community First was to participate
under the parties’ contract.
Despite such evidence indicating that the promissory note
is the underlying indebtedness, the June 1, 2017, letter stated
with regard to the underlying obligation that “[a]ll principal
and interest is due on August 1, 2017.” Such date is not con-
sistent with the promissory note being the underlying obliga-
tion, because as we have stated above, the maturity date of
the note is December 15, 2030, payable in annual installments
beginning December 15, 2011. Nothing in the promissory note
indicates any payment was due August 1, 2017, much less
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839that all principal and accrued interest was due on that date.
Why did the parties agree to a maturity date of August 1, 2017,
unless, perhaps, it refers to a due date of another obligation not
disclosed in the record?
We note that the June 1, 2017, letter and subsequent let-
ters extending the maturity date stated that the purpose of the
underlying obligation was to “Refinance Existing Debt.” This
would appear to indicate a refinancing of the promissory note
and possibly other indebtedness of the Kleins to First Central.
Such refinancing conceivably could have involved some sort
of short-term indebtedness of the Kleins with all principal
and accrued interest being due on the date stated in the let-
ter. However, First Central provided no evidence showing any
obligation from the Kleins to First Central that had a maturity
date consistent with the August 1, 2017, date listed in the June
1 letter or the dates listed in the subsequent extensions.
Conflicting evidence in this case indicates a genuine issue
of material fact regarding not only the maturity date of the
underlying obligation, but also the specific indebtedness
from the Kleins that was arguably the underlying obligation
in which Community First was participating. It is not clear
whether the underlying obligation is the 2011 promissory note
or some other unspecified indebtedness of the Kleins to First
Central. This uncertainty further creates ambiguity regarding
the meaning of the contract between the parties, particularly
the “Maturity Date” listed for Community First. If the only
underlying obligation is the 2011 promissory note, then the
statement in the letter dated June 1, 2017, that all principal and
accrued interest was due on August 1, 2017, becomes ambig­
uous. The Kleins were not obligated to pay all principal and
accrued interest on the promissory note on August 1. That cre-
ates a question of fact as to whether the principal and accrued
interest due on August 1 were related to some indebtedness
of the Kleins other than the note or whether the reference
meant that First Central was obligated to pay all principal and
accrued interest to Community First on that date, independent
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Cite as 310 Neb. 839of any payments the Kleins were required to make on the
underlying debt.
In summary, we conclude that the evidence in this case indi-
cates at least three genuine issues of material fact. First, is the
maturity date of the underlying obligation that is the subject of
the contract August 1, 2017, later extended to December 15,
2018, as indicated by the commitment letters and the signature
page for Community First, or is it December 15, 2030, as indi-
cated by the signature page for First Central? Second, is the
underlying obligation the promissory note that has a maturity
date of December 15, 2030, or is the underlying obligation
some unidentified short-term indebtedness of the Kleins to
First Central that has a maturity date of August 1, 2017, later
extended to December 15, 2018? Finally, if the underlying
obligation is the promissory note that has a maturity date of
December 15, 2030, what is the meaning of the reference in
the commitment letter and its extensions to all principal and
accrued interest being due on August 1, 2017, later extended to
December 15, 2018, and does such reference indicate a guar-
antee by First Central to pay Community First all principal and
accrued interest on that date, independent of the Kleins’ obliga-
tions and performance under the promissory note?
Because genuine issues of material fact exist, First Central
has not shown that it is entitled to judgment as a matter of law,
and we therefore reverse the district court’s grant of summary
judgment in favor of First Central. However, Community First
also has not shown its entitlement to judgment as matter of law,
and therefore, the district court did not err when it overruled
Community First’s motion for summary judgment. Therefore,
the cause should be remanded to the district court for further
proceedings to determine, inter alia, the issues set forth in the
preceding paragraph.
CONCLUSION
We conclude that genuine issues of material fact exist
­regarding First Central’s obligations under the contract between
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COMMUNITY FIRST BANK v. FIRST CENTRAL BANK McCOOK
Cite as 310 Neb. 839the parties and that neither party has shown it is entitled to
judgment as a matter of law. The district court therefore erred
when it sustained First Central’s motion for summary judgment
and dismissed Community First’s complaint. We reverse the
district court’s order dismissing Community First’s complaint,
and we remand the cause for further proceedings.
Reversed and remanded for
further proceedings.