In Re: Autostyle Plastics, Inc., Debtor. Bayer Corporation v. Mascotech, Inc. Citicorp Venture Capital, Ltd. And the Treasurer of the State of Michigan, as Custodian of Several State Retirement Systems

This complex case concerns a reasonably simple issue: the relative priority of claims to the proceeds of a bankruptcy estate. Plaintiff Bayer Corporation ("Bayer") appeals the bankruptcy court's judgment, affirmed by the district court, granting summary judgment to defendants, MascoTech, Inc. ("MascoTech"); Citicorp Venture Capital, Ltd. (CVC or Citicorp); and the Treasurer of the State of Michigan, as custodian of several state retirement systems (SMRS) (collectively "the defendants"), in this adversary action relating to the bankruptcy of AutoStyle Plastics, Inc. ("AutoStyle"). Both the district court and the bankruptcy court concluded that the defendants' claims have priority over Bayer's claim. For the following reasons, we affirm.

Before reviewing the facts, we will briefly review the procedural history of this case, which explains how this inter-creditor dispute between Bayer and the defendants developed within the context of AutoStyle's bankruptcy proceeding. On June 3, 1996, AutoStyle filed a Chapter 11 petition with the bankruptcy court. On June 7, 1996, the bankruptcy court entered an order authorizing the lease and sale of all personal property of AutoStyle, including machinery and equipment that served as collateral for Bayer's security interest, to Venture Industries Corporation ("Venture"). On July 30, 1996, AutoStyle's Chapter 11 case was converted to Chapter7.

On September 17, 1996, the bankruptcy court entered a Consent Order Providing Adequate Protection and Other Relief that directed Venture to pay its monthly lease payment of $257,000 directly to CIT Group/Credit Finance, Inc. (CIT), rather than to Bayer. CIT had a perfected first-priority security interest in all of AutoStyle's assets. The loans that CIT made to AutoStyle through its credit facility had been repaid by this time; however, certain loans made by the defendants pursuant to participation agreements in the credit facility had not been repaid. It is because of these participation interests that the bankruptcy court ordered payment by Venture to CIT, rather than to Bayer. Bayer acknowledges CIT's first-priority status, but contends that the defendants' participation agreements are subordinate to Bayer's lien position.

On February 27, 1997, Bayer filed a Motion for Adequate Protection Directing Trustee to Make Rental Payments to Bayer Corporation ("Motion for Adequate Protection") in the United States Bankruptcy Court for the Western District of Michigan. Bayer asserted that it has a security interest in certain machinery and equipment of AutoStyle that is second in priority to CIT's security interest and ahead of the defendants' participation interests. Bayer argued that CIT's secured interest was paid in full and that rental payments should be directed to Bayer as the holder of the next secured interest following CIT. The bankruptcy court agreed to treat Bayer's motion as an adversary proceeding.

After several telephonic status conferences and scheduling orders and extensive discovery, the parties filed cross-motions for summary judgment. On December 31, 1997, the bankruptcy court issued its first opinion, granting, in part, the defendants' motion for summary judgment and denying Bayer's motion for summary judgment. The court granted the defendants summary judgment as to Bayer's contention that the defendants' claims be equitably subordinated to Bayer's claim. The court ruled that it did not have jurisdiction to address Bayer's argument that the defendants' participation agreements be recharacterized from debt to equity. Finally, the court did not reach a decision as to whether the defendants' participation agreements with CIT were valid. Instead, the court required the defendants to show evidence that they provided payment to CIT for their participation interests. The defendants complied with the bankruptcy court's requirement.

On July 14, 1998, the bankruptcy court issued a supplemental opinion, finding that the participation agreements were valid and reaffirming its December 31, 1997 opinion. Bayer appealed. On May 25, 1999, the district court affirmed the bankruptcy court's opinion with respect to all issues except Bayer's claim that the defendants' alleged debt should be recharacterized as equity. The district court ruled that the bankruptcy court had jurisdiction to address this issue and remanded it to the bankruptcy court.

On remand, acting at the defendants' suggestion, the bankruptcy court agreed to review the record and the previously filed briefs to determine whether the recharacterization issue could be decided without further hearing. On August 18, 1999, without further hearing, the bankruptcy court issued an opinion rejecting Bayer's recharacterization claim. On December 16, 1999, the district court affirmed the bankruptcy court's decision. Bayer subsequently filed a timely appeal.

AutoStyle was originally incorporated as C & F Stamping, Inc., in the mid-1960s. Starting in the mid-1970s, AutoStyle began manufacturing plastic parts for the automotive industry. AutoStyle eventually moved into a process known as reaction injection molding, where two or more chemicals are mixed and reacted to form flexible plastic. Bayer was AutoStyle's exclusive supplier of these chemicals. Bayer also provided credit and other financial accommodations to AutoStyle.

On March 16, 1982, AutoStyle entered into a long-term credit facility (also referred to as a revolving-loan agreement) with CIT. The credit facility was secured by a properly and continuously perfected blanket lien on substantially all of AutoStyle's assets. The credit facility was expandable in that it contemplated the possibility of future advances. Specifically, it stated that CIT agreed "[t]hat it will from time to time make advances to [AutoStyle]."

On March 28, 1985, AutoStyle, Inc. was formed. The same day, AutoStyle, Inc. acquired the majority of the outstanding stock of AutoStyle. CVC and SMRS were shareholders of AutoStyle, Inc. CVC owned approximately 35% of AutoStyle, Inc. stock and SMRS owned approximately 16% of AutoStyle, Inc. stock. The remaining 49% of stock was divided between the prior owners of AutoStyle; certain senior management; and Patrick Bailey, for pre-acquisition sales commissions. After the transaction, AutoStyle and AutoStyle, Inc. retained separate Boards of Directors.

On November 18, 1987, AutoStyle and AutoStyle, Inc. held meetings of their Boards of Directors to discuss AutoStyle's cash flow problems. At these meetings, AutoStyle, Inc.'s Board of Directors approved the borrowing of up to $4,000,000 from CVC and SMRS. AutoStyle's Board also recognized that AutoStyle "is in desperate need of $4 million dollars short-term cash." Richard M. Cashin, Jr., a director of AutoStyle and AutoStyle, Inc. and a senior officer (and later president) of CVC, stated that CVC might be interested in loaning AutoStyle $2 million if it received AutoStyle warrants in connection with the offering. On November 19, 1987, AutoStyle's attorney wrote a letter to Cashin confirming the planned loan to AutoStyle and enclosing a letter agreement regarding the stock warrants and a proposed note from AutoStyle for $2 million. The letter confirmed CVC's intention to wire transfer the funds the next day. There was no indication of participation in CIT's credit facility or a security interest in favor of CVC in either the Board minutes, counsel's letter, or proposed note from AutoStyle to CVC.

This planned direct loan never occurred. Bayer admits that the "[t]he record contains no explanation for why the direct loan was not ultimately documented as such." Instead, the parties entered into a different form of transaction. The record contains a document entitled "Subordinated Participation Agreement" between CIT and CVC ("First Participation Agreement"), whereby CVC paid $2 million to CIT, which allowed CIT to fund additional borrowings by AutoStyle. The First Participation Agreement granted CVC a 100% "subordinated participation" in CIT's credit facility in exchange for the $2 million CVC paid to CIT. CVC would receive repayment only if AutoStyle paid CIT and only after CIT and other loan participants received repayment for their shares of the loan. In addition, AutoStyle signed a separate demand note and CVC received stock warrants directly from AutoStyle, Inc. The defendants state that the additional funding was used by AutoStyle primarily for working capital. This transaction was the first of five subordinated participation agreements that CIT entered with the defendants, with each one expanding the total amount of CIT's credit facility.

On January 12, 1988, SMRS entered into a separate "Subordinated Participation Agreement" with CIT, substantially similar to the participation agreement between CVC and CIT ("Second Participation Agreement"). Pursuant to the agreement, in exchange for $935,252, SMRS was granted a portion of CIT's credit facility. SMRS would be repaid under the same terms as CVC: only if AutoStyle repaid the loan and only after CIT and other loan participants were repaid. AutoStyle signed a separate demand note and SMRS received stock warrants. The defendants note that the funding was also used by AutoStyle primarily for working capital.

On March 15, 1988, AutoStyle made a presentation to Bayer, formally asking Bayer to guarantee a proposed $4 million loan from Mellon Bank. At the presentation, AutoStyle provided Bayer a "debt schedule as of January 31, 1987 [sic, 1988]" itemizing AutoStyle's notes payable. The debt schedule described a "Citicorp bridge loan with warrants" of $2 million and a "State of Michigan bridge loan with warrants" of $935,252 (emphasis added). Bayer states that it was never specifically informed by AutoStyle, CVC, or SMRS, that the $2 million and $935,252 loans were secured by the senior security interests in favor of CIT.

On August 11, 1988, CVC and CIT amended the First Participation Agreement to increase CVC's participation from $2 million to $4.5 million ("Third Participation Agreement"). The defendants state that this money was wire transferred to CIT and permitted CIT to provide additional funding to AutoStyle, which used it primarily for working capital. AutoStyle executed demand notes directly to CIT in connection with this additional funding.

On September 30, 1988, Bayer executed a guarantee to Mellon Bank for a $4 million loan to AutoStyle for it to purchase certain equipment. AutoStyle entered into a Security Agreement granting Bayer a security interest in machinery and equipment, second in priority only to the lien in favor of CIT. The parties signed financing statements that were filed on behalf of Bayer in all required filing locations. Bayer's September 30, 1988 security interest remains perfected today.

The participation interests of CVC and SMRS in CIT's credit facility were disclosed in general terms in AutoStyle's audited 1987-1988 financial statements dated May 31, 1988, and in all subsequent annual audited financial statements, copies of which were provided to Bayer. These statements do not refer specifically to the participation interests of CVC and SMRS. Instead, they refer to the existence of the CIT credit facility and the fact that CIT and certain AutoStyle "shareholders" had made arrangements for AutoStyle to borrow additional money through the credit facility. In addition, the stated amount of the credit facility was higher in each financial statement. At the time of the September 30, 1988 agreement, SMRS had security interests, other than the participation agreements, in its name. Thinking that it had knowledge of all of SMRS's security interests, Bayer requested that SMRS subordinate those liens and financing statements to those of Bayer and SMRS agreed.

Around the time of Bayer's September 30, 1998 agreement, Pittsburgh National Bank loaned AutoStyle $8.5 million to purchase and install a paint line in AutoStyle's facilities. The loan was guaranteed by PPG Industries, Inc., a principal supplier of paint products to AutoStyle. At about the same time, Bayer directly loaned AutoStyle approximately $1.3 million (which AutoStyle later repaid) to purchase and install a tank farm to house Bayer products.

On November 29, 1988, AutoStyle obtained a "solvency opinion" from Marshall and Stevens. The opinion concluded that AutoStyle's assets exceeded its liabilities, that AutoStyle could pay its liabilities as they came due, and that AutoStyle was adequately capitalized. Shortly after the release of the opinion, MascoTech purchased one-half of the common stock of AutoStyle's parent, AutoStyle, Inc., for $10 million and loaned AutoStyle another $26.8 million.

On March 19, 1990, CIT and MascoTech entered into a "Subordinated Participation Agreement," similar to the CVC and SMRS agreements. There was a slight difference in that MascoTech agreed to purchase, on demand from CIT after AutoStyle's default or at any time sooner at MascoTech's option, a $1.5 million participation interest in the CIT facility ("Fourth Participation Agreement"). CIT did not make a demand for these funds until October 1996, after AutoStyle filed for bankruptcy, at which time MascoTech paid the $1.5 million under its agreement with CIT.

Also on March 19, 1990, CVC amended the First and Third Participation Agreements by letter agreement with CIT, increasing CVC's participation in CIT's credit facility by $1.5 million ("Fifth Participation Agreement"). The terms of this amendment were similar to those of MascoTech's participation agreement: CVC agreed to purchase, on demand from CIT after AutoStyle's default or any time sooner at CVC's option, a $1.5 million participation interest in the CIT facility. This amount also was not funded until October 1996, after AutoStyle filed for bankruptcy.

These final two participation interests were disclosed in AutoStyle's audited financial statements. MascoTech and CVC paid CIT $3 million under their respective agreements in October 1996, after AutoStyle filed for bankruptcy.

Bayer possesses a total secured claim against AutoStyle in a principal amount of $2,915,379.23, plus other charges. In aggregate, the defendants are owed approximately $8,435,252, consisting of amounts funded pursuant to the participation agreements.

This court reviews a bankruptcy court's grant of summary judgment de novo. See City of Mt. Clemens v. United States Envtl. Prot. Agency, 917 F.2d 908, 914 (6th Cir. 1990). A bankruptcy court's grant of summary judgment is reviewed with all facts and inferences considered in the light most favorable to the non-moving party. See In re Julien Co., 44 F.3d 426, 429 (6th Cir. 1995). Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). In deciding a motion for summary judgment, this court views the factual evidence and draws all reasonable inferences in favor of the non-moving party. See National Enters., Inc. v. Smith, 114 F.3d 561, 563 (6th Cir. 1997). To prevail, the non-movant must show sufficient evidence to create a genuine issue of material fact. See Klepper v. First Am. Bank, 916 F.2d 337, 341-42 (6th Cir. 1990) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). A mere scintilla of evidence is insufficient; "there must be evidence on which the jury could reasonably find for the [non-movant]." Id. at 342 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986)).

On appeal, Bayer argues that the bankruptcy court erred in granting the defendants' motion for summary judgment. Bayer asserts that its cross-motion for summary judgment should have been granted, or in the alternative, it requests that we reverse the decision granting the defendants' motion for summary judgment and remand this case for trial. Bayer's request complies with decisions of this court that have held that "[t]he fact that both parties make motions for summary judgment . . . does not require the Court to rule that no fact issue exists." Begnaud v. White, 170 F.2d 323, 327 (6th Cir. 1948) (cited with approval in Cherokee Ins. Co. v. E. W. Blanch Co., 66 F.3d 117, 122 n.4 (6th Cir. 1995)); see also B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d 587, 593 (6th Cir. 2001); Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir. 1991).

The dispute in this case turns on whether Bayer or the defendants have a higher priority interest in proceeds from AutoStyle's bankruptcy estate. The parties do not dispute that CIT is first in priority based on its security interest in AutoStyle's assets that was filed after CIT and AutoStyle entered the 1982 credit facility. Bayer argues that it is in line behind CIT - but ahead of the defendants - based upon its security interest in AutoStyle's assets that was filed after the 1988 loan guarantee that Bayer made to Mellon Bank. The defendants argue that, through their participation agreements, they are effectively in line with CIT and, therefore, ahead of Bayer. Bayer relies upon four legal theories to support its assertions that the defendants' claims should be subordinated to Bayer's claim. We will address each of these arguments in turn.

A. Alleged Invalidity of the Participation Agreements

Bayer contends that the defendants did not have "true" participations in CIT's credit facility. The defendants, on the other hand, argue that their participation agreements are valid and enforceable. As a result, the defendants claim that they have the same priority position as CIT, placing them ahead of Bayer in the receipt of proceeds from AutoStyle's bankruptcy estate.

Before analyzing the arguments of the parties, it is useful to begin with a brief overview of the concept of participation agreements.

"A participation is not a loan. To the contrary, a participation is a contractual arrangement between a lender and a third party whereby the third party, labeled a participant, provides funds to the lender . . . ." Natwest USA Credit Corp. v. Alco Standard Corp., 858 F. Supp. 401, 407-08 (S.D.N.Y. 1994). The lender, in turn, uses the funds from the participant to make loans to the borrower. See id. at 408. "The participant is not a lender to the borrower and has no contractual relationship with the borrower." Ibid. The participant's only contractual relationship is with the lender; the participant has no ability to seek legal recourse against the borrower. See W. Crews Lott et al., Structuring Multiple Lender Transactions, 112 Banking L.J. 734, 736 (1995); Patrick J. Ledwidge, Loan Participations Among Commercial Banks, 51 Tenn. L. Rev. 519, 528 (1984).

Since a participation is, by its nature, contractual, the parties to a participation agreement may choose whatever terms they wish and the agreement will generally be enforced as to its terms. See First Bank of WaKeeney v. Peoples State Bank, 758 P.2d 236, 238 (Kan. Ct. App. 1988). The parties to a participation agreement are attracted by certain incentives. For the lead lender, the attractions are many:

The lead [lender] receives immediate repayment of a portion of the loan from the participants, and is thereby able to make additional loans to either the same or to new borrowers. The lead [lender] also earns income in the form of loan origination fees and loan servicing charges. At times, the participation device permits the lead institution to accommodate consumer credit demands without exceeding its legal lending limit. The loan participation is appealing because it allows a lending institution to share the lending risk.

W.H. Knight, Jr., Loan Participation Agreements: Catching Up with Contract Law, 1987 Colum. Bus. L. Rev. 587, 589 (1987). By entering into participation agreements, then, the lender obtains the benefit of being able "to make a loan which is greater than its lending authority." First Bank of WaKeeney, 758 P.2d at 238. The participant, on the other hand, "obtains the benefits of the lender's security interest and priority of payment." Natwest USA, 858 F. Supp. at 408 (emphasis added).1

In In re Coronet Capital Co., 142 B.R. 78 (Bankr. S.D.N.Y. 1992), the court devised a four-part definition of a "true" participation agreement: (1) money is advanced by a participant to a lead lender; (2) the participant's right to repayment only arises when the 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. Id. at 82; see also In re Sackman Mortgage Corp., 158 B.R. 926, 933 (Bankr. S.D.N.Y. 1993) (applying Coronet factors); In re Yale Express Sys., Inc., 245 F. Supp. 790, 792 (S.D.N.Y. 1965) (first articulating factors adopted as four-part definition in Coronet). We believe that this definition accurately describes the factors that must be considered in order to determine if the parties have, in fact, entered into a participation agreement or another type of transaction simply labeled a participation agreement.

The defendants argue that the characteristics of their five participation agreements meet this definition. Bayer disputes this, asserting that the bankruptcy court erred in granting summary judgment in favor of defendants since genuine issues of material fact exist as to each factor.

1. Do the Agreements Document the Parties' Intentions?2

The defendants argue that the participation agreements themselves and the conduct of CIT as lead lender and the defendants as participants, all demonstrate that the parties intended that the transactions be "true" participation agreements. The defendants note that AutoStyle's annual financial statements, which Bayer received, made reference to there being participations in CIT's credit facility. The financial statements did not specifically mention the defendants, nor did they specifically state that the defendants entered into participation agreements with CIT, but they did state that "shareholders" of AutoStyle advanced additional funding to AutoStyle through CIT's credit facility.

Bayer contends that the district court improperly relied on the title of each of the participation agreements as an indication of the parties' intention to treat the transactions as participations in CIT's loans. Bayer asserts that the parties' intentions and actions contradict the terms of the agreements. Bayer cites evidence from board meetings of AutoStyle and AutoStyle, Inc., indicating the companies contemplated that CVC and SMRS would fund direct and unsecured "bridge loans" with warrants. Bayer uses this evidence to allege that the First and Second Participation Agreements were originally intended to be bridge loans. In addition, Bayer presents evidence that, after the First and Second Participation Agreements were drafted and signed, AutoStyle gave Bayer documents indicating that the participations were unsecured "shareholder bridge loans." Bayer also relies on a CIT memorandum regarding AutoStyle that listed the defendants as "Participants" in "Special Loans" separate and distinct from and subordinated to CIT's loans and those of other participants in CIT's credit facility. Finally, Bayer relies upon an affidavit from a retired Mellon Bank official stating that "this method of providing funds by an insider is nothing more than, in reality, a capital infusion and should be treated accordingly."

Bayer's arguments are unavailing. The facts indicate that the parties intended the transactions to be true participation agreements. The fact that the first two participation agreements may originally have been intended to be another form of agreement is not by itself sufficient to demonstrate a genuine issue of material fact. Although the parties may have contemplated a different type of agreement, the transactions that the parties actually completed are what we must analyze since it is to these agreements that the parties ultimately agreed to bind themselves. Moreover, the fact that AutoStyle may have represented the transactions as bridge loans in documents it gave to Bayer is of little import, since AutoStyle was not a party to the agreements. Finally, the CIT memorandum that described the defendants' participations as "Special Loans" was not inaccurate. The memorandum made clear that the defendants had participations in CIT's credit facility and indicated that the defendants' participations were subordinated to CIT and other participants in the loan.

The language and form of the agreements indicates that the parties intended that the defendants have a participation interest in CIT's credit facility. The demand notes executed by AutoStyle were given to CIT as the lender. In addition, the stock warrants granted to CVC and SMRS referred to the holder's participation in AutoStyle's loans from CIT.

Bayer also cannot rely on the fact that the credit facility expanded as the defendants made their loans. Indeed, one of the purposes of participation agreements is to give the lender the ability to expand its loan beyond its own limits. See Bank of WaKeeney, 758 P.2d at 238. The fact that the defendants' loans were subordinated to the loans of CIT and the other participants in the credit facility is also of little help to Bayer. The participants had the ability to bargain for their relative position of repayment within the credit facility and the defendants took the risk of a subordinated, higher-risk position relative to the lead lender and other participants. See In re Felicity Assocs., Inc., 197 B.R. 12, 15 (Bankr. D.R.I. 1996) (upholding validity of subordinated participation agreement and stating that a "participation agreement has 'no specified or standard form [and] no statutory characteristics, and often operates in conjunction with other documents ....'") (quoting Alan W. Armstrong, The Evolving Law of Participations, R175 ALI-ABA 255, 257 (Apr. 2, 1992)).

Bayer is left to rely only on circumstantial evidence and the affidavit of an official from the bank that loaned AutoStyle the funds that Bayer guaranteed. The official's conclusory statement that the defendants' participations are really infusions of capital is not sufficient to overcome the overwhelming evidence that the defendants and CIT intended to enter "true" participation agreements.

2. Did CIT Have the Sole Right to Seek Legal Recourse Against the Borrower?

The participation agreements explicitly give CIT the sole right to seek legal recourse against the borrower.3 Moreover, the bankruptcy court noted that the defendants did not file a proof of claim against AutoStyle. The bankruptcy court determined that this was consistent with a legitimate participation, since the lead lender holds the exclusive power to file a proof of claim. See In re Felicity, 197 B.R. at 14.

Nevertheless, Bayer claims that there is evidence outside of the agreements indicating that the defendants did not look solely to CIT to enforce their loans. Bayer points to that fact that one of the defendants, CVC, filed a Motion to Compel Payment of Net Rental Payments with the bankruptcy court on May 9, 1997, and the defendants have provided the principal opposition to Bayer's Motion for Adequate Protection. Bayer claims that the lead lender, CIT, should have taken action to enforce the participation loans, not the defendants.

The defendants point out that, under the participation agreements, CIT is entitled to reimbursement of its attorneys' fees for any defense costs before distribution to the defendants. The defendants state that, therefore, they chose not to use CIT's Chicago counsel and incur reimbursement costs to CIT, but instead retained their own Michigan counsel to pursue this litigation. The defendants rely on Natwest USA, 858 F. Supp. at 402-03, 408-09, in which a participant litigated a priority dispute with another creditor after the lead lender was repaid in full. However, in that case, the lead lender filed an interpleader action to allow the participant to litigate the case, an action that did not occur in this case.

We believe that the actions of the defendants do not cast doubt on the language in the participation agreements stating that the lead lender has the sole right to seek legal recourse against the borrower. Although CIT did not file an interpleader action, it was not improper for CIT to allow the defendants to hire their own counsel and provide the principal opposition to Bayer's motion in light of the fact that the defendants would have to reimburse CIT for the costs of litigating this action. Furthermore, the defendants are not seeking recourse from AutoStyle in this action; rather, they are opposing Bayer's claimthat the defendants should not receive proceeds from AutoStyle's bankruptcy estate ahead of Bayer. Indeed, CVC's Motion to Compel Payment was filed in response to Bayer's Motion for Adequate Protection. Bayer is unable to point to any action by which the defendants sought legal recourse directly from AutoStyle prior to the commencement of this litigation.

3. Do Participants' Rights to Repayment Arise Only When Lead Lender is Paid by Borrower?

In a true participation agreement, "the participant gets paid from money the lead lender receives from the borrower." In re Coronet, 142 B.R. at 82. According to the agreements, the defendants' rights to repayments arose only when CIT was paid by AutoStyle.4 In addition, other sections of the agreements indicate that the defendants relied upon the creditworthiness of AutoStyle and the collateral securing the loan.5 In other words, the defendants did not look to CIT to provide payments to them directly; they only looked to AutoStyle to provide payments to CIT, which would then provide payment to the defendants after CIT and the other loan participants were paid.

Bayer fails to provide an adequate argument contradicting the language of the agreements. Bayer argues that the defendants could not have relied upon AutoStyle for repayment because by 1990 AutoStyle was in serious financial difficulty. However, the extent to which AutoStyle was in poor financial straits does not change the language of the agreements, which states that the defendants were to be paid only when CIT was paid by AutoStyle. Moreover, the fact that the defendants had a subordinated participation interest, in which they would not be paid until CIT and other participants were paid in full, does not affect this analysis since the defendants relied solely on the creditworthiness of AutoStyle for repayment. This case is unlike Coronet, for example, in which the participant had a "contractual guarantee of repayment." 142 B.R. at 82. In Coronet, the lead lender was required to pay the participant, notwithstanding the payments it received from the borrower. See ibid. There is no evidence of such an arrangement between CIT and the defendants.

4. Did Participants Advance Money Directly to Lead Lender?

The defendants rely upon evidence that they submitted indicating that they paid money directly to CIT, not to AutoStyle. Other evidence demonstrates that only CIT loaned funds to AutoStyle and only CIT had a direct contractual relationship with AutoStyle.

Bayer is unable to establish a genuine issue of material fact as to this element. Bayer relies only on minor inconsistencies in the record, none of which directly contradict the facts presented by the defendants indicating that they paid money directly to CIT.

* * *

After assessing each of the four elements necessary for a "true" participation agreement, we conclude that the defendants have convincingly demonstrated that each of the participation agreements meets this definition. The facts relied upon by Bayer are insufficient to establish a genuine issue of material fact as to validity of the agreements.

Since we have determined that the participation agreements were valid, legal, and enforceable, the weight of Bayer's three remaining arguments is significantly weakened.

B. Alleged Failure to Perfect a Security Interest

Bayer argues that the defendants should have obtained a security agreement signed by AutoStyle as required by Section 9-203 of the Uniform Commercial Code (U.C.C.). In addition, Bayer argues that the defendants did not file financing statements disclosing that they were secured creditors, as required by Section 9-402 of the U.C.C.6

Bayer argues that by failing to give notice that they were funding AutoStyle, the defendants "deceptively denied Bayer the opportunity to make an informed decision" regarding whether Bayer's credit terms should be different, whether subordination agreements should be demanded,7 and whether to extend additional credit.

Bayer's claim is wholly without merit. The U.C.C. does not require participants to obtain separate security agreements or to file separate financing statements, nor does the U.C.C. require a lead lender's financing statement to identify participants in the underlying loan. A loan participant does not obtain a separate security interest for which it is required to file a separate financing statement; rather, it "obtains the benefits of the lender's security interest and priority of payment."Natwest USA, 858 F. Supp. at 408 (emphasis added). When participation agreements "clearly contemplate a sale and complete transfer of an ownership interest to the participant," as in this case, "[t]he participant then owns an undivided portion of the [lead lender's] loan and any security interest thereunder." Bradford Anderson, Loan Participations and the Borrower's Bankruptcy, 64 Am. Bankr. L.J. 39, 42 (1990). As one observer has stated:

The custom among banks has been that the [participant] makes no effort to perfect any security interest it may have, either by filing under the Uniform Commercial Code or under recording laws relating to real property. Rather, the [participant] relies upon the [lead lender] and the filings and recordings made by the [lead lender] for the perfection of its rights against the borrower's property. Section 9-302(2) of the Uniform Commercial Code provides that if a secured party assigns a perfected security interest, no filing under Article 9 is required in order to continue the perfected status of the security interest. In defining a 'secured party,' section 9-105 of the Code provides that when the holders of obligations issued under an indenture of trust, equipment trust agreement, 'or the like' are 'represented' by a trustee or other person, the representative is the secured party.

Ledwidge, supra page 11, at 529. We believe that this "custom" is supported by cases, which in analogous circumstances have considered the issue of whether a participant in a loan is required to file separate financing statements.

In First State Bank v. Towboat Chippewa, 402 F. Supp. 27 (N.D. Ill. 1975), a creditor challenged a properly perfected ship mortgage on the ground that a loan participant was not specifically named there