German residents may sue U.S. rating agency for Lehman rating before German courts
March 2013
The Federal Court of Justice has confirmed that German courts may have jurisdiction for a claim by a German investor in Lehman certificates against a U.S. rating agency.
The claimant’s case was based on the defendant’s rating, contained in a prospectus, for certain Lehman entities. The Frankfurt Higher Regional Court accepted jurisdiction relying on the presence of assets belonging to the rating agency in Germany. These assets derived from annual income from subscription agreements with German customers. The Frankfurt court also found a sufficient connection with Germany as the claimant had his habitual residence in Germany. The Federal Court of Justice upheld this ruling.
The claimant, a German national resident in Germany, had bought certificates issued by a Dutch Lehman entity in March 2008. The prospectus had contained an A+ rating both for the issuer and Lehman Brothers Inc provided by the U.S. ratings agency Standard & Poor’s. The claimant sought damages from the rating agency, asserting that the rating was incorrect and that his reliance on it led him to buy the certificates.
The Frankfurt Regional Court initially dismissed the claim for lack of jurisdiction. The Higher Regional Court of Frankfurt found jurisdiction based on s23 of the German Code of Civil Procedure (quasi in rem jurisdiction) which applies if a defendant has assets located in the court’s jurisdiction. This rule applies to proprietory claims against a non-resident defendant, but the assets must not be “insignificant”. The court held that the defendant had assets in Germany derived from its yearly six digit income from subscription agreements with German customers. Assets could also comprise claims against a debtor, and as some of the defendant’s debtors were located in Frankfurt these also constituted assets within the court’s jurisdiction.
However, under previous case law quasi in rem jurisdiction also required a sufficient connection with Germany. On appeal, the Federal Court of Justice agreed with the Higher Regional Court’s analysis and also confirmed that the requirement for a sufficient connection was satisfied because the claimant lives in Germany. In this context, the Federal Court of Justice emphasised that s23 of the German Code of Civil Procedure is designed to protect German residents. The fact of the claimant’s residence sufficed, but the court also emphasised that the claimant was a German national.
Comment
These decisions highlights how, where the matter falls outside the scope of the Brussels Regulation, German residents may make use of the quasi in rem jurisdiction to bring claims in Germany against foreign defendants. If a defendant has significant assets in Germany, this can be used as the basis of the jurisdiction of German courts. Such assets can be claims for payment against a defendant’s German customers.
The proceedings in this case will now continue before the Frankfurt courts, and it will be interesting to see the outcome on the merits. The claimant based his claim on the principle of an agreement with protective effect for third parties (Vertrag mit Schutzwirkung zugunsten Dritter). The investor argued that the agreement between the rating agency and the Lehman entity had a protective effect for investors as it had been clear that they would rely on the rating agency’s rating. German law generally allows a third party in certain circumstances to derive claims from a contractual relationship between two other parties. One of the conditions to such a claim is that the defendant ought to have foreseen that the third party (the claimant) would be affected by the agreement. The agreement between the rating agency and the issuer was governed by New York law but the claimant contended that German law applied to his claim. Hence, the first question to be decided by the court will be which law applies.
