In the landmark case of Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) [2014] EWHC 3106 (Comm), the High Court of England has  allowed an SPV, as the issuer of commercial mortgage backed securities, to bring a claim against a valuer who provided a negligent valuation for a property which was used as collateral.

The facts

In this case, the Plaintiff was an SPV called Titan, incorporated by Credit Suisse to act as the  issuer of commercial mortgage backed securities (CMBS).

Prior to the securitisation process, the Defendant (Colliers) negligently overvalued a commercial  property in Nürnberg, Germany (the "Property").  On the back of the €135 million valuation, Credit  Suisse made a loan of €110 million to Valbonne, the owner of the Property.  €99 million of that  €110 million loan was then acquired by Titan in 2006 in exchange for funds raised by the issue of  notes.  Under the contractual terms of the CMBS, the Plaintiff was obliged to distribute any  litigation proceeds to the note-holders according to a waterfall.

The tenant of the Property became insolvent in 2009 and Valbonne defaulted on its loan shortly  after. The Property was ultimately sold for €22.5 million prompting the Plaintiff to bring  proceedings against the Defendant for negligently overvaluing the Property.

The court had to decide, among other things, whether the Plaintiff was the correct entity to bring  the action as opposed to the note-holders themselves and whether it could be said that the  Plaintiff had suffered loss.

Judgment

The High Court held that as a matter of principle, rights arising out of debt instruments (such as  notes) attach to the debt instruments themselves for the benefit of the holder from time to time.   However, the High Court thought it unlikely that any individual holder would be able to bring a  successful claim in negligence against a valuer as they would be unable to prove reliance and loss.

Although it was the note-holders who had suffered economic loss, as a matter of law that did not  preclude the Plaintiff from suffering loss. The Court went on to hold that the Plaintiff had  suffered loss at the time the loan was purchased because it had acquired a chose in action worth  less than the price paid for it. Reliance on the Defendant's valuation was also a necessary element  of the claim, albeit one that was easy to prove. The Court, following a detailed review of the law, held that the Defendant's valuation of the Property was negligent for being outside the appropriate 15% margin of  error.  In part, this was due to a lack of consideration as to the likely effect of the tenant leaving the Property.

Conclusion

Titan Europe follows a line of modern case law which increasingly refuses to accept 'no-loss'  arguments in the context of complex financial instruments.  In this case, it was crucial to the  bringing of the claim that the Plaintiff was contractually obliged to distribute any sums it  received to the note-holders. Although the decision turned on its facts, the contractual terms  discussed are common in the market and it is likely that other issuers will find themselves in a  similar situation.