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Securitised loans: who is the proper claimant for losses caused by negligent valuation of underlying security?

15 December 2015

​The transferee SPV of a non-recourse securitised loan is the proper claimant in respect of losses said to have been caused by the allegedly negligent valuation of underlying security, the Court of Appeal has found in obiter comments in Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) [2015] EWHC Civ 1083. Although the court reversed the High Court decision concerning the valuation, the issue concerning who has title to sue in these circumstances will be of interest to the securitisation industry.

In 2005 Credit Suisse First Boston International (CSFB) lent Valbonne Real Estate BV (Valbonne) EUR 110 million. Valbonne owned a large 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 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). In June 2006, Titan bought the package of loans using funds provided by subscribers for the Notes.

In 2009 Valbonne defaulted under its Facility Agreement. In 2010 different valuers valued the Property at EUR 12.4 million. Titan began proceedings against Colliers 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.

As well as denying that it had been negligent, a main plank of Colliers' defence in the High Court was that Titan was the wrong claimant. Collier argued that Titan had issued the Notes on a non-recourse basis, and so had suffered no loss. Blair J ruled that Colliers had been negligent, and that Titan had been a proper claimant. Colliers appealed.

Colliers not negligent – 15% margin of error

Blair J held that the Property had been worth EUR 103 million at the date of valuation, as against Colliers' negligent valuation of EUR 135 million, so Colliers were liable for EUR 32 million in damages. Blair J had commented that an acceptable, or non-negligent, margin of error for a valuation could, in certain conditions, be as much as 15% above or below the "true market price". However, he also held that a valuation of the Property at below EUR 100 million would have had no credibility in the market.

On appeal, Longmore LJ agreed with Colliers that it did not make sense for the High Court to have found a true value of EUR 103 million, subject to a margin of 15%, while saying that a valuation below EUR 100 million would have carried no credibility in the market. In reviewing actual transactions involving the Property, he also noted that it had been sold six months before the valuation for EUR 127 million. It was therefore "inconceivable", in a rising market, that the correct value could have been only EUR 103 million. The court held that "the correct value was in the region of EUR 118.3 million" and Colliers' valuation of EUR 135 million was, therefore, within the 15% margin and so was not negligent.Who was the proper claimant?

As Colliers had not been negligent, the question of whether Titan had title to sue was not relevant, and the rest of the court's comments were obiter. However, as Longmore LJ said, the question of title to sue "is probably of more importance to the securitisation industry than the outcome of any one valuation", and the court would therefore express its view.

Longmore LJ noted that Titan was he legal and beneficial owner of both the securitised loans and the securities", which meant that it was "not at first sight easy to see why Titan… cannot sue Colliers", and that was so even though Titan was obliged to pass on any recoveries it might make. What happened to any recoveries was "a matter with which Colliers should have no legitimate concern".

He also drew attention to the certificate which Colliers issued with its valuation. This contained a wide category of parties which were allowed to rely on the valuation, including "any actual or prospective purchaser, transferee, assignee, or service provider of the loan, and prospective investor… in any securities evidencing a beneficial interest in or backed by the loan [and] any trustee for bond holders holding bonds backed by the loan". Counsel for Colliers argued that, since this meant the Noteholders had their own right of action, "it could not have been intended that Titan should have a cause of action as well".

However, Longmore LJ rejected this. The choses in action that Titan held were "just as much property as any other sort of property and… entitle[d] it to sue for substantial damages if it [had]… a cause of action at all."

Longmore LJ also questioned whether the Noteholders could actually bring claims in such circumstances. It was possible that any Noteholder who attempted to bring a claim would be met by the argument that his loss was in fact reflective of losses suffered by Titan. If so, Noteholders might be unable to recover. The Noteholders themselves also had no contractual relationship with Colliers in this case.

Finally, he rejected Colliers' argument as being factually wrong: "it is not correct to say that Titan suffered no loss. It suffered a loss when it acquired the loan and the securities… The price it paid for the loan was too high. Titan's relationship with the Noteholders is analogous to that of a company with its shareholders: no one suggests that because the shareholders may be the ultimate losers in a case of this kind, the company has not suffered a loss."

COMMENT 

Negligence

The case does not raise any new legal principles concerning valuations, though Longmore LJ's judgment gives a useful overview of how negligence is assessed in the context of valuing buildings.

One striking practical feature of the case was the range of values which two experts, and two different courts, ascribed to the Property. Titan's expert initially valued the Property at EUR 61 million, later revised to EUR 76.6 million. Colliers' valuation had valued it at EUR 135 million, Blair J at EUR 103 million and the Court of Appeal at EUR 118 million – while accepting that a valuation of EUR 135 million was not negligent. The Property was finally sold for only EUR 22.5 million.

It is difficult to see what clients can do to protect themselves against the risks posed by professional valuers whose expert opinions can vary so widely, though it might perhaps be possible to contract on the basis that the parties agree on the acceptable range of the margin around "true" value. From valuers' perspective, this case suggests that particular care should be given to qualifying valuations when appropriate – the Property was an unusual one, and its value was particularly dependent on a key tenant. A valuer is less likely to be found to have been negligent if the degree of uncertainty about a specific valuation is made suitably clear. Longmore LJ's judgment does not say why Colliers agreed to allow so many – generic – parties to rely on its valuation. This was perhaps a pre-condition which CSFB imposed for the valuation contract, but, as a point to be agreed between the parties, it is clearly a key means of limiting valuers' risk.

Proper claimant?

As regards who had title to sue, the decision will be a welcome confirmation for parties involved in securitisation and similar structures, as it makes clear that issuers are proper parties for bringing comparable claims. In any event, the question of who has title to sue is a point that people involved in securitisations should be careful to make clear in the relevant documents.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.