A recent decision out of federal court arising out of litigation involving a Ponzi scheme has reinforced the principle that the lead in a loan participation does not owe a fiduciary duty to participants. The case of Finn v. Moyes (Finn v. Moyes, 2017 WL 1194192 (D Minn 2017)) arose from a Ponzi scheme whereby First United Funding, LLC (“First United”) defrauded numerous banks of over $90 million. A receiver was appointed to recover funds and sued a number of parties for, among other things, aiding and abetting the fraud carried on by First United.

The receiver claimed that one group of defendants (the “Moyes”) had actual knowledge of the fraudulent conduct and aided and abetted First United by fraudulently over-pledging collateral. The Receiver also alleged that the most of the other loans made by First United were to parties that the Moyes had introduced to First United.

Moyes moved for summary judgment on the Receiver’s aiding and abetting claim. The court noted that under Minnesota law to prove its claim the Receiver would need to show: (1) First United committed a tort that caused an injury to the participant banks; (2) Moyes knew that First United’s conduct constituted a breach of duty; and (3) Moyes substantially assisted or encouraged First United in the achievement of the breach.

Moyes argued that the Receiver’s claim failed because no fiduciary relationship existed between First United and the loan participants. The court agreed, finding that case law supports the proposition that absent a specific contractual provision creating such a duty, the lead/participant relationship is not a fiduciary one. This is so even if the language in the agreement loosely refers to the lead as the “agent” for the participants. Likewise, no fiduciary duty existed where the agreement obligated the lead bank to administer the loan with the same degree of care that the lead bank would exercise in servicing the loan on its own account.

Bank Takeaway: The decision is a reminder to banks engaged in selling loan participations to pay close attention to the language used in the loan participation agreements. Most standard form documents will either be silent on the issue of fiduciary duty or will affirmatively disclaim it. Banks that are using their own bank created documents should check and make sure that there is no ambiguity on this issue.