Court confirms obiter that issuer in CMBS structure has title to sue a valuer in a CMBS securitisation
In the last edition of Banking Disputes Quarterly, we reported that the Court of Appeal was due to consider the Commercial Court's ruling in Titan Europe 2006-3 plc v Colliers International UK plc  EWCA Civ 1083. The first instance decision was significant as it was the first analysis by an English Court as to whether the SPV issuer of commercial mortgage-backed securities (CMBS) or the noteholders of the securities was the appropriate claimant to pursue a negligence claim against the valuers of the underlying commercial property.
On the facts of this case, the Commercial Court found that the issuer could bring the claim, that the valuer had indeed been negligent, and awarded damages to the issuer. The Court of Appeal has now overturned that decision on the facts, but has confirmed the principle that an issuer may bring a claim in negligence against the valuer in the context of a CMBS structure.
The Commercial Court decision at first instance
Prior to the global financial crisis in 2005, the landlord of a warehouse in Germany sought a loan from Credit Suisse to be secured against the property. Credit Suisse instructed Colliers to value the property and, on the basis of Colliers' valuation of €135 million, advanced a facility of €110 million to the landlord.
The loan was packaged as part of a loan portfolio acquired from Credit Suisse by an SPV, Titan Europe 2006-3 plc (Titan), and the noteholders in Titan thus became the ultimate beneficiaries of the loan. In September 2009, following the collapse of Lehman Brothers and the global financial crisis, both the landlord and tenant of the property which Colliers had valued became insolvent. The last payment of rent to the landlord was made in December 2009 and ultimately the security over the property was enforced and the property sold for €22.5 million.
Titan, as the issuer of the notes, brought a claim against Colliers for negligently over-valuing the property. Colliers argued that Titan did not have standing to bring the claim, since it was the noteholders, not Titan as issuer, who suffered the loss, the no-recourse provisions of the notes effectively passing any losses from the loan portfolio to the noteholders. Further, Colliers pointed to the possibility of duplicated liability if both Titan and the noteholders were permitted to bring parallel claims. These were the questions which were of broader interest to participants in the CMBS industry.
The Commercial Court rejected Colliers' arguments, Blair J basing his decision primarily on the contractual framework in relation to the notes, emphasising the importance of the underlying contractual terms to issues of standing and loss in complex financial instrument cases such as this. Here, the contractual framework made Titan responsible for administering the CMBS structure, including taking recovery action where necessary and distributing any sums recovered to noteholders pursuant to the payment waterfall provisions in the securitisation documents. Blair J questioned whether in the circumstances of this case the noteholders could have brought their own claim against Colliers, given the difficulty of establishing reliance and loss in circumstances where the defaulting loan was only one of a number of loans in the portfolio.
As regards the question of Colliers' alleged negligence, Blair J held that Colliers had indeed been negligent and that the true value of the property at the time of the valuation was €103 million, as opposed to the €135 million valuation given by Colliers. Titan was therefore entitled to sue for damages in the sum of €32 million, being the difference between Colliers' €135 million valuation and the true value of €103 million.
The Court of Appeal decision
The Court of Appeal overturned the decision insofar as it related to Colliers' negligence, finding that the true value of the property of the relevant time was likely to be around €118 million and therefore within an acceptable margin of error from Colliers' valuation of €135 million.
However, the Court of Appeal acknowledged the importance to the CMBS industry of the underlying questions of principle as to who had standing to bring the claim and who had suffered the loss, and therefore considered it appropriate to express its views on an obiter basis. On these issues, the Court of Appeal followed Blair J's ruling in the Commercial Court.
As regards title to sue, the Court of Appeal noted that it would have put primary emphasis on the fact that Titan remained the legal and beneficial owner of the loan and of the securities. The Court of Appeal said that fact of itself gave Titan a right to sue and recover substantial damages.
As regards who had suffered the loss, the Court of Appeal rejected Colliers' argument that Titan had suffered no loss, finding that Titan did sustain a loss at the point it acquired the loan from Credit Suisse, because the price Titan paid for the loan portfolio was based on the over-valuation of the property, and was therefore too high.
The Court of Appeal drew an analogy between Titan and its noteholders and the relationship between a company and its shareholders, noting that: "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". The court also noted that if the noteholders had brought their own claim separate from the claim by Titan, Colliers might have argued that the loss claimed by the noteholders was reflective of Titan's loss and should thus be defeated by the doctrine of reflective loss, as exemplified by Johnson v Gore Brown  2 A.C. 1.
The Court of Appeal's confirmation of the principles underlying the Commercial Court's first instance judgment is significant. These decisions resolve previous uncertainty as to the possibility of an issuer bringing a negligence claim against a valuer. Going forward, issuers, investors and other participants in the CMBS market should proceed on the basis that such claims may well be possible in the English Courts, subject to careful review in each case of the specific terms of the relevant contractual documents.