What if a loan buyer knows that the lead bank does not have the right to sell the loans to the buyer? What if the loan buyer asks for assurances from the lead bank that it will pay the participants from the loan sale proceeds, yet the lead bank refuses to give such assurances? What if the buyer buys the loans notwithstanding
these circumstances? Is the buyer liable to the participants when the lead bank fails to pay them?

No, according the Appellate Court of Illinois. Ottawa Savings Bank v. JDI Loans, Inc., et al., 2007 Ill. App. LEXIS 686 (June 25, 2007). The reason? A loan participant
can only look to the lead bank for satisfaction of its loans. Absent proving that the loan buyer was a party to any agreements with the participants, the loan buyer owes no duty to the participants.
This, notwithstanding that:

(1) the participation agreements provided that the lead bank did not have any ownership
interest in the participation loans and did not have the right to sell the participation loans;

(2) the loan buyer was provided with a copy of the participation
agreement form; and

(3) the loan buyer asked for various forms of assurances that the lead bank would pay the proceeds to the participants (payoff letters from participants, payment of the sale proceeds to the lead bank’s attorney, execution of a side letter stating that the lead bank will pay the participants), yet all such requests were refused by the lead bank.

It may be of some consolation that the president of the lead bank subsequently was imprisoned for bank fraud.