In a judgment dated October 8 2002, the Civil Court of Créteil declared Crédit Lyonnais liable for the losses suffered by two of its clients as a result of securities transactions which the bank had actively encouraged despite the plaintiffs' situation.
In 1999 the plaintiffs had been advised by Crédit Lyonnais to invest all of their savings, about €120,000, in securities listed on the French monthly settlement market. However, at that time both were unemployed, and the couple earned about €2,200 per month. When the plaintiffs started suffering losses on their securities account, Crédit Lyonnais not suggested only that they invest their minor son's savings in securities, but also that they submit their purchase orders via their older son's account without his authorization. The couple's losses kept increasing. To mitigate the deficit on their securities account, Crédit Lyonnais granted the couple a loan and credit facility.
By January 2001 the plaintiffs had lost all of their savings, and their debts towards the bank resulting from their unsuccessful investments amounted to €486,000. Crédit Lyonnais then changed its attitude. The bank deprived the plaintiffs of any means of payment, and seized their accounts and their interests in a business they were running, while informing Banque de France of their situation. Conversely, all these transactions had earned about €683,000 in fees and interest to Crédit Lyonnais. The bank refused to enter in any settlement agreement with its clients and brought a claim against them with a view to obtaining reimbursement of their debts.
The court noted that Crédit Lyonnais's clients were not professionals, and that the investments proposed and executed by the bank were not proportionate to their revenues. According to the court, the fact that Crédit Lyonnais had provided the plaintiffs with general information on the risks of trading on the monthly settlement market did not exempt it from complying with its advisory duty. Crédit Lyonnais, although aware of its clients' situation, had let their debts increase seriously without intervening to limit them, and this constituted a breach of its advisory duty.
Finally, the court took into consideration the irregularities committed by the bank, especially the use of the accounts of the plaintiffs' son without his authorization, and concluded that Crédit Lyonnais had been negligent. Thus, Crédit Lyonnais was declared liable for the losses suffered by the plaintiffs and was ordered to pay €487,265 to them. The latter were in turn ordered to use the damages to pay their debts to the bank.
Duty as a lender
This case is consistent with case law on banks' information and advisory duties, whether acting as professional lender or as financial intermediary. As a lender, a bank owes its clients a duty to inform and advise.(1) These two duties are autonomous - compliance with the duty to inform, which requires that loan offers meet certain substantial formalities, does not exempt the bank from fulfilling its advisory duty.(2)
Pursuant to case law, a bank breaches its advisory duty when it grants a loan which it knew was not proportionate to the recipient's revenue, and it may be held liable for the damages suffered by the borrower as a result of his or her incapacity to repay such a loan.(3)
Therefore, compliance with the advisory duty compels banks to refuse to grant loans which would excessively burden their borrowers. The decision that Crédit Lyonnais had breached its advisory duty by allowing its clients' debt to increase in a disproportionate manner, was thus consistent with former case law.
Duty as a provider of investment services
As account holder and financial intermediary, Crédit Lyonnais encouraged its clients to invest on the monthly settlement market despite their personal and financial situation. Article L 533-4 of the French Monetary and Financial Code, and Article 3(3)(5) of the General Regulations of the Conseil des Marchés Financiers (CMF), require that providers of investment services assess their clients' professional competency, taking into account their financial situation, investment experience and goals.
Providers of investment services must also inform their clients of the potential risks of the contemplated transactions (Article 3(3)(5) of the CMF General Regulations). This obligation may be viewed as a mere duty to inform which would exempt the investment provider from interfering with its clients' projects. However, authors generally believe that informing someone of the risks incurred by a transaction amounts to advising that person to be cautious before entering into such transaction, and potentially to change their mind.(4)
This opinion was shared by the Tribunal de Grande Instance of Créteil, which considered that delivering to the plaintiffs a prospectus providing general information on the risks incurred by transactions on the monthly settlement market did not exempt Crédit Lyonnais from its advisory duty.
Thus, Crédit Lyonnais was declared negligent for breaching its advisory duty, both as lender and as a provider of investment services. Crédit Lyonnais has not yet announced whether it will appeal the decision.
For further information on this topic please contact Philippe Portier or Raphaële Navelet-Noualhier at Jeantet & Associés by telephone (+33 1 45 05 81 96) or by fax (+33 1 47 04 87 98) or by email ([email protected] or [email protected]).
Endnotes
(1) Cass Com December 11 1990, Rouppert v CEPME, RJDA 2/91 135; Rev dr bancaire et de la bourse, September-October 1995, 51, p185.
(2) Cass Civ June 27 1995, SA Crédit Foncier de France v Garcia, RJDA 12/95 1400 ; Rev dr bancaire et de la bourse, September-October 1995, 51, p185.
(3) Cass Civ June 27 1995, SA Crédit Foncier de France v Garcia, RJDA 12/95 1400.
(4) See comments of M Cabrillac and B Teyssié, in RTD Com, 1993, p702 as regards Cass Com May 18 1993, decision issued in connection with transactions on derivative markets.