In September 2014 the Commercial Court ruled that Colliers International (UK) PLC ("Colliers") was negligent in its valuation of property used as collateral for a securitised loan.

The case was regarded as significant because it was the first decision by an English court on the issue as to whether an issuer of commercial mortgage-backed securities ("CMBS") can pursue a negligence claim against valuers in respect of their advice to the original lender at the time of the loan. The issues are due to be re-examined in October 2015 when the case, Titan Europe 2006-3 plc v Colliers International UK plc [2014] EWHC 3106 (Comm), heads to the Court of Appeal.

Background

The valuation related to a commercial property which Colliers valued for Credit Suisse. Relying on the valuation, Credit Suisse used the property as security for a loan in December 2005.

In June 2006 the loan was transferred to Titan Europe 2006-3 plc ("Titan") as part of a particularly complicated securitisation. Essentially the securitisation packaged into transferable securities 18 loans together with securities for the loans which took the form of mortgages over 40 commercial properties. Titan issued securities in the form of Commercial Mortgage Backed Floating Rate Notes ("Notes") in which investors ("Noteholders") subscribed. Titan used the subscription to fund the acquisition of the loans from Credit Suisse.

Titan later sued Colliers but the Noteholders did not. It is not clear from the judgment why the Noteholders chose not to sue.

Issues

One of the key issues for the court was whether Titan was the right claimant.

Colliers argued that Titan was not entitled to bring the claim because as a non-recourse issuer of the securities it had suffered no loss. Colliers argued that the Noteholders should bring the claim as they were the ones who had sustained loss and had directly or indirectly relied on the valuation.

In contrast, Titan argued that it was the party to whom the loan and the security for the loan were transferred at the time of the securitisation and therefore it had incurred loss and had the right to sue. Any claim by the Noteholders would face "intractable" difficulties because:

  • any duty of care which Colliers might have owed to the Noteholders was negated by the structure of the securitisation and in particular by warnings and disclaimers about relying on any valuation set out in the Note Term Sheet, the Offering Circular and a CD ROM attached to it. These disclaimers would have made it unreasonable for the Noteholders to have relied on the valuation in deciding to purchase the Notes;
  • there would be a host of practical difficulties for Noteholders in making good a claim, including difficulties in: ascertaining who the class of Noteholders should be; quantifying loss; proving causation; and working out how to deal with the priorities of different classes of Noteholders.

The judge noted that whilst, from an economic perspective, it was the Noteholders who suffered the loss (with Titan in essence acting as an economically neutral conduit between the Noteholders and the debt in which they were investing), Titan nevertheless suffered a loss itself at the moment when it purchased the loans which made up the asset base for the securitisation. This was because it acquired a chose in action worth less than the price it had paid for it. Titan’s right to bring a claim did however depend on it being able to show that it was contractually obliged to distribute any sums it received from the litigation to the Noteholders in accordance with the payments waterfall set out in the transaction documents. Provided that that was the case, the fact that the finance scheme had the effect of spreading the loss did not "affect the incidence of the basic loss".

The fact that Titan received funds from the Noteholders which were used to fund the purchase of the loan assets was irrelevant, as was the fact that the securities were issued on a non-recourse basis.

Titan was awarded damages of €32m.

Comment

Apart from the size of the award, the case is notable because it opens the gate for further negligence claims involving securitised loans. In the past there has been considerable uncertainty about whether such claims are viable. Issuers, investors, servicers and CMBS professionals generally will therefore await the Court of Appeal’s decision with keen interest. Though much depends on the particular contractual terms in question, any further clarification from the Court of Appeal about claims in this area will be welcomed.