Community & Southern Bank vs. First Bank of Dalton

Trial court erred in initial proceeding and again on remand by failing to permit successor bank to deduct its expenses prior to distributing sale proceeds, in accordance with participation agreements; a participation agreement and Georgia precedent required proceeds to be distributed pro rata based on ownership interest in the loans. Community & Southern Bank v. First Bank of Dalton, 344 Ga. App. 815, 811 S.E.2d 490 (2018).

Gilmer Bank, later succeeded by Community & Southern Bank (“CSB”), issued to a borrower two loans secured by a security deed in the same land, and Gilmer Bank subsequently sold participation interests in the loans to three participating banks. Thereafter, the borrower defaulted on both loans, and CSB foreclosed on and sold the secured property. Two participating banks then filed a petition for equitable relief, alleging in part, CSB was not entitled to deduct its fees and expenses prior to distributing the sale proceeds to the banks and that CSB’s intended distribution violated the contracts and course of performance. Stearns, the third participating bank, also counterclaimed that the distribution of the sale proceeds should be done based on a pro rata basis based on ownership interests between the two loans. Stearns owned a 100% participation interest in one of the loans and a 45.946% participation interest in the other, totaling 86.252% of the total debt. Opposing Stearns’s counterclaim, the other two participating banks argued, in part, that special equities existed which made pro rata distribution of the proceeds inappropriate because they were not made aware of the full extent of the participation interests obtained by Stearns.

The trial court entered an order largely in the two participating banks’ favor, which among other things, included awarding the minimum distribution amount to the participating banks (but deferring determination of the final distribution amount) and denying CSB’s deduction of expenses from such amount before distribution. The trial court also denied Stearn’s motion for summary judgment, which sought a ruling that the sale proceeds should be done based on a pro rata basis based on ownership interests between the two loans – the trial court concluded that the issue should be decided by a jury. 

Throughout multiple appeals, CSB argued that the trial court erred by failing to deduct CSB’s expenses, entering partial summary judgment in the participating banks’ favor and awarding attorney’s fees. Similarly, Stearns argued that the denial of the motion for summary judgment was inappropriate based on the clear language of the participation agreement and court precedent.  Agreeing with CSB that the default provision in the participation agreements permitted the deduction of the sale-related expenses, the Georgia Court of Appeals vacated the trial court’s order. The Georgia Court of Appeals also reversed the trial court’s denial of Stearns’ summary judgment motion. The court reasoned that the default provision in one of the participation agreements required pro rata distribution of the proceeds based on ownership interest in the subject loan and that where separate loans are secured by a single security deed, as the case here, the court’s precedent states that the holders of the separate debt are entitled to their pro rata share based on their ownership interests in both loans absent “an agreement or special equities to the contrary.”  The Georgia Court of Appeals disagreed with the other two participating bank’s position that any special equities to the contrary existed.