Court of Appeal hands down judgment and finds for defendant valuers in Titan v Colliers (2015)
On 3 November 2015, the Court of Appeal handed down judgment in the Titan v Colliers case, overturning the High Court's finding that Colliers was negligent.
The case concerned Colliers' valuation in December 2005 of a large (242,195m²) commercial property ("the Property") in Nuremberg, Germany, occupied by Quelle – at the time, Germany's biggest mail-order company, which occupied the Property on a 15-year lease, expiring in 2016. Colliers valued the Property at €135 million. In reliance on the valuation, Credit Suisse made a loan of €110 million to Quelle's landlord, Valbonne. In 2006, the loan was securitised with numerous other loans and was purchased by Titan, a newly incorporated special purpose vehicle, which issued around €1 billion of floating-rate loan notes to investors. Quelle and Valbonne subsequently became insolvent and Valbonne defaulted on the loan in around 2009. The Property was eventually resold for only €22.5 million.
Titan pursued a claim against Colliers, in which it alleged that the true value of the Property in December 2005 had been only €76.6 million. Titan sought damages equivalent to the SAAMCo cap of €58.8 million.
At first instance, Blair J. found liability to have been established, on the basis that the true value of the Property had been only €103 million and the bracket of reasonable valuations had been 15% either side of this, such that the valuation of €135 million fell outside the bracket. The judge's finding as to true value was a somewhat surprising inference on the evidence, which showed that, amongst other things, in the same year as Colliers' valuation, and in a rising market, there had been two other valuations and one sale of the Property all at levels above the top end of the judge's bracket. The judge also rejected Colliers' argument that, as a non-recourse issuer of the loan notes to investors, Titan had, in any event, suffered no loss. Damages of €32 million were awarded to Titan.
Colliers subsequently appealed on two principal grounds: (1) that the true value of the Property had been substantially higher than €103 million; and (2) that Titan did not have title to sue and, even if it did, had itself suffered no loss in any event.
Finding of breach of duty overturned
On ground (1), the Court of Appeal substituted a true value of €118.3 million and, as a result, found that Colliers' valuation fell within a 15% margin of error and had not been negligent. Attributing particular importance to the fact that, only six months prior to Colliers' valuation, the Property had been sold for €127.1 million, Longmore LJ held that it was "inconceivable" that the true value in December 2005 could have been as low as €103 million and that the judge at first instance had wrongly proceeded without regard to evidence of an actual sale, which Phillips J (in Banque Bruxelles Lambert v Eagle Star Insurance (1995)) had called "the most cogent evidence" of any property's market value. Referring also to three other occasions between September 2003 and March 2005 on which the Property had been valued by others at between €114.7 million and €134.5 million, Longmore LJ further noted that a value of €103 million would be "perilously close" to the figure of €100 million which the trial judge had himself said was the "absolute minimum that would have carried any credibility in the market". He found that the evidence provided by the earlier sale and valuations justified a yield of 7.4%, lower than the trial judge's figure of 8.5%. He added that, although the Court of Appeal had reached its conclusion without taking into account the rising market that had been current in 2005, this would have been yet another factor in Colliers' favour.
The securitisation issue
The securitisation issue was rendered redundant by the exoneration of Colliers on liability grounds. Expressing obiter views on ground (2), however, the court commented that, since Titan had retained legal and beneficial ownership of both the loans and the loan notes, it would have retained the right to sue Colliers for substantial damages. The court was also not prepared to dismiss the claim on the basis that the noteholders, not Titan, had suffered the loss. Taking a novel approach, which did not arise out of either side's submissions, the court drew an analogy with the relationship between a company and its shareholders, commenting that the fact that the investors in the loan notes had been the ultimate losers did not mean that Titan itself could not have sustained a loss. Rather, if (contrary to the court's finding on the valuation) Colliers had negligently overvalued the Property, Titan would have suffered a loss as soon as it acquired the loans and securities (including the Property) from Credit Suisse.
It is certainly positive that an appellate court felt able to overturn the trial judge's views on valuation and adopted an approach more precise than simply "splitting the difference" between the retrospective calculations of opposing experts. Equally welcome is the court's recognition that the pre-crash rising market is a relevant factor that should be taken into account. Together, these findings suggest (at least implicitly) that the Court of Appeal is keen to take full account of the reality of the sustained boom in the pre-2008 European property market and to avoid hindsight to the greatest extent possible.
Less positive, on the other hand, is the court's obiter comments on the question of whether an issuer of mortgage-backed securities had standing to pursue a claim against a valuer retained by an original lender. As was submitted by Colliers, this exposes valuers instructed in the context of securitisations to the risk of liability to both investors and the issuer of securities. The Court of Appeal's analysis of this important issue was surprisingly brief.
However, every securitisation will be factually distinct and valuers will be appointed on different terms and will accept different responsibilities in relation to each transaction. It is clear from both the Court of Appeal and first instance judgments that, in determining the scope of a valuer's duty and in deciding which of a number of entities may have suffered a recoverable loss, there remains no substitute for a close analysis of both the specific contractual documentation and the structure of the individual finance transaction in question. An issuer claimant's entitlement to sue valuers in circumstances similar to those in Titan v Colliers may well, therefore, be a matter of dispute in future litigation and should always be assessed carefully by reference to the specific facts in issue.
In a press release published on the same day as the Court of Appeal judgment, Titan's solicitors said that they are considering an application for permission to appeal to the Supreme Court. It will be interesting to see whether the matter proceeds any further.