Canada: Sliver Of Light Appears For Issuers And Noteholders In Key UK Negligence Decision

In a recent decision, the English High Court has held that a valuer was liable in relation to its negligent valuation of a property that was collateral for a securitised loan.  The judgment in Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) , will be of interest to investors, issuers and other participants in the CMBS industry that may be contemplating negligence claims against valuers.

The case arose out of a complex structured finance transaction.  The valuation concerned a property in Germany (the Property) which was owned by a company called Valbonne.  Credit Suisse identified the Property as suitable for a CMBS transaction.  The Property was subsequently valued at 135m Euro by Colliers and Credit Suisse agreed to lend 110m Euro to Valbonne based on the valuation.

Credit Suisse then incorporated an SPV to be the issuer of the CMBS securities which they named Titan.  Titan acquired 18 loans from Credit Suisse including a senior tranche of the Valbonne loan totalling 99m Euro.

In 2009 the tenant of the Property became insolvent and Valbonne defaulted on its 110m Euro loan.  Ultimately the value of the Property collapsed and was sold for 22.5m Euro in 2014.  Titan then brought an action in negligence against Colliers for overvaluing the Property.
The issues were; was Titan as an SPV entity the right party to bring a claim and was the valuation by Colliers negligent.

In their defence Colliers claimed that Titan had not suffered any loss as that was suffered by the noteholders, who had relied on the valuation in deciding whether to invest in Titan and by selling the securities Titan had been made whole so suffering no loss.

Titan however, submitted that it had suffered a loss from the outset when it purchased the Valbonne loan from Credit Suisse because the overstated value of the property resulted in Titan purchasing a loan that was worth less than the value paid for it.  Blair J agreed and considered it irrelevant that the SPV had received funds from the investors that were used to fund the purchase of the loan assets. It was also irrelevant that the securities were issued by the SPV on a non-recourse basis.

It was also relevant that Titan was contractually obliged to distribute any sums received in the claim to noteholders in accordance with the payments waterfall set out in the transaction documents.

The court also found that the valuation was plainly out of line with market evidence of the value of the Property at the relevant time, as Colliers had failed to give sufficient weight to the fact that it was a large and aged property which had been purpose built to the tenant's business.  A reasonably competent valuer should have concluded that there was a real risk that if the tenant left the Property, then it would be unlikely to attract sufficient demand and under these circumstances the court valued the Property at the relevant time to be 103m Euro.

There are a range of permissible margins of error within which a reasonably competent valuer could have valued the Property and if the valuation is within the range then the valuation will not be considered to be negligent.  In this case where the Property has exceptional features the acceptable margin of error could be 15% which left the Collier valuation outside the acceptable margin of error and thus negligent. 

Having established negligence the court then turned to causation and reliance.  The court found that Credit Suisse would not have made a loan secured on the Property if it had been provided with an accurate valuation and that Titan would not have acquired its interest on the basis that the originating bank would not have been in compliance with the 90 per cent. loan to value warranty it gave.  Blair J. noted that the valuation was transferred as security in relation to the securitisation and held that Titan had also relied on it (specifically the valuation figure) when purchasing its interest.   Colliers were found to be liable for the damage flowing from the valuation being wrong and damages were capped at the difference between the true market value and the actual valuation. Judgment was made in favour of Titan in the amount of 32m Euro.

That Titan could, in the event of a negligent valuation, bring a successful claim will be of interest to other issuers and noteholders.  Where transaction documents provide for the proceeds of any claim to flow to the relevant parties then the courts are prepared to accept claimants such as Titan provided the relevant parties get what they bargained for and with payment waterfalls standard in CMBS structures, this judgment may have investors and noteholders re-visiting past transactions.

The approach of the court in this case provides a formula for overcoming the difficulties faced by noteholders in CMBS structures when trying to establish standing and quantifying loss in a multiple asset portfolio where the value of notes is linked to the performance of multiple assets.  By revisiting and scrutinising the accuracy of each valuation on each asset individually issuers and noteholders now have a way forward to assess the merits of taking claims forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.