Key Point

An SPV in a CMBS issue was a proper plaintiff in a negligence action brought against a valuer who had advised one of the original lenders on the value to be attributed to a property for a loan which had been subsequently transferred to the SPV as part of the structured financing. It made no difference that the notes issued by the SPV were limited recourse so that its liability to noteholders was capped to the proceeds received in relation to the loan.

Facts

Titan was an SPV used in a CMBS structured finance transaction. Titan issued notes to various noteholders and with the proceeds of those notes acquired a portfolio of property loans from originating banks. The underlying property loans Titan acquired were secured. Valuations had been performed in order to give the relevant lender comfort that it was not lending too much against the relevant property. Titan's liability to noteholders was non- recourse meaning that if the value of the loan portfolio was not sufficient to repay noteholders in full they had no further claims against Titan.

One loan involved a property in Germany. That property had been valued by Colliers at Euro 135m. Titan claimed the correct value was Euro 76m and claimed damages of Euro 58m.

The valuer argued he was being sued by the wrong party. Colliers argued the whole securitisation was set up in such a way to make it clear it was the noteholders who had relied upon their work and who would sustain any loss as a result of their valuation. Titan's liability to repay was non- recourse and so it could not suffer any loss.

Decision

The Commercial Court held that Titan could bring the claim. First the judge thought it wrong to conclude from the transaction as a whole that Titan suffered no loss. Titan could show reliance on a valuation which negligently valued the security at more than it was worth, and it suffered a loss the moment it purchased the loan because it acquired a chose in action worth less than the price it paid for it. As a general rule, a cause of action in tort accrues when damage is suffered. The fact the notes were non-recourse was in his view irrelevant.

The judge went on to state:

A securitisation like this one is neither a conventional loan, nor a conventional issue of securities in which investors look to the issuer (corporate or sovereign) to repay the debt. In complex structured financial transactions of this kind, the developing case law shows that the courts are reluctant to accept "no loss" arguments. As this case shows, the distribution of loss can be difficult to pin down, and depends on when investments were acquired, market movements, and the performance of the rest of the transaction. The important points are that (1) where the contractual structure allocates the bringing of a type of claim to a particular party, that party brings the claim, complying with any conditions for doing so, and (2) that the proceeds are dealt with according to the contractual requirements. Provided this happens, all parties will get what they bargained for.

Comment

The case considered for the first time who is the correct plaintiff where a CMBS portfolio has suffered as a result of a negligent valuation connected to one of the portfolio loans. The judge also made it clear that he thought that claims such as this attach to the notes themselves for the benefit of the holder for the time being. This he said follows from the nature of such notes as transferable instruments, encapsulating within them a bundle of rights in favour of the holder. It made no difference that in accordance with modern practice, the instruments are not in paper form. As he said at paragraph 106:

"A negligence claim against valuers who appraised the security for the notes is essentially an aspect of recovery on non-repayment of the loan in question, and in my view it goes with the notes."

There are probably more claims of this nature to come.