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Securitised Loans: Who is the proper claimant for losses caused by negligent valuation?

Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) [2014] EWHC 3106 (Comm), 30 September 2014.

The transferee of a non-recourse securitised loan, rather than the noteholders, was the proper claimant in a claim against a valuer for losses caused by the negligent valuation of the underlying commercial property (which had been carried out for the original lender). The presence of a contractual obligation for the transferee to pass on proceeds of a successful claim to the noteholders, coupled with the loss suffered when the transferee purchased the loan for more than it was worth, were persuasive factors supporting the transferee's right to bring a claim.

On 22 December 2005, Credit Suisse First Boston International (CSFB) loaned EUR 110 million to Valbonne Real Estate BV (Valbonne). Valbonne owned a very large commercial property in Nuremburg (the Property), on which the loan was secured. 

In deciding to make the loan, CSFB relied on a valuation of the Property by Colliers International UK plc (Colliers). CSFB then securitised the loan, together with a package of other loans secured on other properties. As part of this, Titan Europe 2006-3 plc (Titan) was created as a special purpose vehicle. Titan's roles included issuing floating rate notes (the Notes). On 27 June 2006, Titan bought the package of loans using funds provided by subscribers for the Notes.

Other than the land value of the site, or the ability to attract replacement tenants for a huge, aging and complex set of buildings, a principal component of value in the Property was the covenant of the then tenant, Quelle Aktiengesellschaft (Quelle). However, in 2009 Quelle's parent company filed to open bankruptcy proceedings and Valbonne defaulted under its Facility Agreement. Quelle's lease was terminated at the end of 2009 and by January 2010 Jones Lang Lasalle valued the Property at EUR 12.4 million. Titan began proceedings against Collier in negligence for undervaluing the Property. Titan alleged that it had suffered a loss by buying the package of loans, where the security was far less than it had been led to believe by the valuation.

Who was the proper claimant?

One of Collier's main arguments in its defence was that Titan was the wrong claimant. Titan had issued the Notes on a non-recourse basis, and so had lost nothing. Collier argued that CSFB might possibly have suffered loss when it lent to Valbonne, but it had not brought any claim. Assuming the Noteholders had relied on Collier's valuation, they were also alternative possible claimants: Colliers' valuation had been addressed, among others, to "any actual or prospective investor… in any securities".

To the extent that Noteholders had assigned claims to Titan (which two of them had), Titan could have claimed as assignees of those Noteholders, but was not doing so.

Further, Colliers said that the securitisation could have been structured to allow specified parties to bring claims based on negligent valuation, but this had not happened and the effect of the structure actually adopted was that the Noteholders were the right claimants, if a claim existed.

In support of its claim, Titan argued that the various "Limitations of Valuations" in, for example, the Term Sheet, Offering Circular and a CD ROM meant that no Noteholder could reasonably have relied on Colliers' work. Even if that were not so, the Noteholders could not form a class of claimants as there was no way of working out who they were. Even if there had been, the Notes were tradable, so membership of such a class might change. Quantifying loss, and showing causation, would be an "intractable obstacle".

On this point, Blair J, perhaps inevitably, held that "in the case of a complex structured financial transaction of this kind, the circumstances in which legal claims may… be brought depend upon the contractual terms, typically contained in a number of different agreements". He also held that, since the Notes were transferrable, "as a matter of principle, rights arising out of [such]… debt instruments attach to the notes themselves for the benefit of the holder for the time being."

Blair J saw force in Titan's argument that there would be real practical difficulties in the Noteholders being the claimants. The difficulties were such that it was "more likely than not" that the Noteholders would not feasibly be able to make a claim. Further, he felt that Colliers' argument that the valuation had been addressed to potential investors was weak in the context of the whole contractual scheme.

Blair J accepted that, in economic terms, it was the Noteholders who had suffered loss, but this did not mean that, in law, Titan could not bring a claim, especially where the effect of the Cash Management Agreement and the Deed of Charge and Assignment was that Titan was contractually obliged to pass on to Noteholders any amounts received from a successful claim. He also held that, if Titan could show causation "it suffered a loss the moment it purchased… a chose in action worth less than the price paid for it". The fact that the funds used for the purchase came from third parties was irrelevant. The fact that Titan was a non-recourse issuer was also irrelevant (this was on the basis of the "res inter alios acta" principle according to which a party's rights normally cannot be affected by rights under contracts to which it is not a party).

On this basis, Titan was a proper claimant.

Was Colliers negligent?

This part of the case did not raise any new legal principles concerning negligent valuations, though Blair J did provide a helpful summary of the basic elements required to bring such a claim. Among these, he noted that a claimant had to show that a disputed valuation "was one which no reasonable valuer would have reached and was outside the permissible margin of error". It follows from this that a court may disagree with a specific valuation without holding that it was negligently arrived at. Rather, a claimant must show that no properly competent and conscientious valuer could have reached such a valuation. Further, (as in many other cases of professional negligence) even a valuer who arrived at a figure outside an appropriate range may escape liability provided he had done his work with reasonable skill and care.

In this case, on the facts, Colliers were found to have been negligent, though both parties agreed that the Property was particularly difficult to value.

Comment: It is difficult to assess the significance of Blair J's ruling for potential claims for negligence where securitisations are involved. Despite its length, the majority of the judgment is taken up with analysis of the different claims made about whether Colliers had in fact been negligent (Blair J did not find that all of Titan's allegations were justified). Rather less was taken up with why Titan was entitled to claim.

Blair J seemed taken by Titan's suggestion that, if it was not a proper claimant, no party would be able to bring a claim for loss which had indeed been suffered. The implication of some of his remarks was that, because Titan was bound to pass on any recovery to Noteholders, allowing Titan as a claimant would ensure practical justice to be done. While there is no general principle that says that, so long as a loss has been incurred due to negligence, recovery will be available even if it involves a "proxy" claimant, this result presumably reflects what the parties – except perhaps valuers – intend in most comparable cases. 

In finding that Titan was a proper claimant, Blair J noted that the complexity of securitisations meant that "the distribution of loss can be difficult to pin down". For those involved in securitisations, disputes like this one can perhaps be most easily avoided by ensuring that there are agreed and clear provisions in the documents which identify parties with a right to claim. This applies equally to, for example, valuers, as it may form a way of limiting their potential exposure, or at least identifying its extent.

As regards Noteholders – who actually bear any economic loss – the case highlights the practical problems they may have in recovering damages unless the documents make clear who is entitled to claim. Further, Blair J made clear that Titan's claim would have failed, but for the provision requiring it to pass on to Noteholders any sums it recovered. While one would often expect such provisions, potential subscribers and later holders should always check that such provisions are in place, or risk being in a position where, even though they have demonstrably suffered a loss through negligence, there is no workable mechanism by which they can get damages.