Must the legal owner of securitised debt and related security disclose in proceedings it brings that it is a bare trustee for the beneficial owner? In addition, is that trustee obliged to join the beneficial owner as a party to those proceedings?
These were the key questions that were considered by the High Court in an appeal from the Circuit Court in the recent case of Pepper Finance Corporation (Ireland) DAC v Jenkins & anor.
The Court rejected yet another novel, procedural challenge to the enforcement of loans, many of which have been subject to securitisation or loan sales. Therefore, the structure of litigation brought by the legal owner of these loans does not need to change from the approach which has already been adopted in very many cases involving non-performing loan sales. Therefore, this decision is a welcome development for current and prospective purchasers of debt and security in the Irish market.
The borrowers entered into a loan agreement with, and executed related security in favour of, GE Capital Woodchester Home Loans Ltd, which later became known as Pepper Finance Corporation (Ireland) Ltd. Pepper subsequently securitised the loan, which had the effect that the beneficial interest in the loan and security was held in trust for Windmill Funding Ltd (“Windmill”), leaving the bare legal interest to Pepper.
The borrowers submitted that Pepper was obliged to bring the proceedings for an order for possession in such a way as to make it clear that it was doing so as trustee for Windmill, the beneficial owner. Alternatively it would require Windmill to join in the proceedings also. They argued that this requirement was not merely procedural, but an essential prerequisite to Pepper being able to succeed in its claim. Otherwise there was a possibility that the borrowers could be exposed to the risk of being required to pay the same debt twice.
The Court decided that Pepper was not obliged either to join Windmill in the proceedings or to declare its status as trustee for Windmill in the proceedings. Pepper was therefore entitled to succeed and the appeal was allowed.
The Court decided that the risk of two claims for payment of the debt, one by the trustee and one by the beneficial owner, was that the debt in question was more hypothetical than real and that in any event the courts would not make two orders for repayment against a borrower.
If notice of an equitable assignment of a loan has not been given to a borrower and the assignor continues to have legal title to the loan, it is now beyond doubt that the assignor may bring proceedings in its own name and on its own behalf without joining the beneficial owner. The assignor trustee does not have to make it clear that it is issuing proceedings as bare trustee on behalf of the beneficial owner.
The decision leaves open the position where a borrower has been given notice of an equitable assignment. In these circumstances, it may be appropriate to note the assignment and confirm that the equitable assignee will be bound by any judgment for or against the assignor.