Highly anticipated in financial circles, the Regional Court Frankfurt am Main (Landgericht, "LG") has now published its ruling dated December 17, 2004 regarding the assignability of loan receivables in view of the principle of banking secrecy (Az. 2/21 O 96/02). In the course of the respective temporary injunction proceeding, the Higher Regional Court in Frankfurt am Main (Oberlandesgericht, "OLG") dated May 25, 2004 (Az. 8 U 84/04) had decided in a remarkable ruling that the parties to the credit agreement had implicitly ruled out the transferability of the loan receivables by contractually agreeing to the principle of bank secrecy. In line with the prior judgment of the LG Koblenz dated November 25, 2004 (Az. 3 O 496/03), the LG Frankfurt in its main proceeding, unlike the OLG Frankfurt, has taken the position that the principle of banking secrecy does not restrict the assignment of loan receivables, thereby confirming the prevailing opinion amongst experts.
The decision of the LG Frankfurt am Main
The LG Frankfurt in particular based its conclusion that no contractual prohibition of assignment can be derived from the principle of banking secrecy on the following grounds:
No violation of Section 134 German Civil Code ("BGB")
The LG Frankfurt stated that the principle of banking secrecy could not be classified as a statutory prohibition in the sense of Section 134 BGB with the consequence of the legal transaction (i.e., the assignment of the loan receivables) being null and void. The LG Frankfurt explicitly stated that existing case law regarding the admissibility of assignment of loans by physicians and lawyers, to which similar confidentiality obligations apply, was not considered to be applicable because the relationship between the bank and its client in general could not be compared with the physician/ patient and lawyer/client relationship. Furthermore, the LG Frankfurt concluded that no prohibition of assignment was derived from the legal nature of the principle of banking secrecy, which is not statutory but rather commonly classified as customary law or understood as ancillary duties within the business relationship between the bank and the client.
No violation of the German Data Protection Act ("BDSG")
No different view need be taken when applying German data protection laws. According to Section 402 BGB, the assignor may be legally bound to disclose the debtor’s personal data to the assignees and to transfer the relevant documents. This might lead to a violation of Section 4 BDSG (Inadmissibility to collect, to process and to use personal data). However, in the case at hand, the interest of the client concerned was not judged to be fully protect-worthy for the fact that the debtor was in default and thereby has shown unlawful behavior. Therefore, the bank was granted a preponderant legitimate interest on the transfer of its claims in the sense of Section 28 BDSG.
No implicit agreement not to assign loan receivables (Sections 399, 400 BGB)
Contrary to the view taken by the judges of the OLG Frankfurt, the LG Frankfurt is of the opinion that the duty of secrecy contained in the standard business conditions of banks does not implicitly rule out the assignment of loan receivables. No other evaluation is required, even if one takes into consideration the significance of the principle of banking secrecy and the related mutual trust amongst the bank and its client. A violation of the fiduciary duty may only lead to potential damage claims but not to the nullity of the legal transaction. The LG Frankfurt is, therefore, consistent with the prevailing view in legal literature and case law (cf. e.g., the ruling of the Federal German Supreme Court - Bundesgerichtshof ("BGH") in Neue Juristische Wochenschrift (NJW) 1982 pp. 2768 et seq.). However, it is important to note that the LG Frankfurt explicitly states that there is no violation of the banking secrecy principle in case the bank observes the legitimate interest of the client to keep client-related information secret, e.g., by limiting the duties arising out of Section 402 BGB, which provides for the duty of information and the duty to transmit certain documents to the assignee. 2
The decision of the LG Koblenz
Similar to the ruling of the LG Frankfurt, the LG Koblenz on November 25, 2004 (Az. 3 O 496/03) is of the opinion that the principle of banking secrecy provides neither for a strict prohibition to pass on client-related information nor a prohibition of assignment regarding loan receivables. Last but not least, the ruling of the LG Koblenz is a decision of particular interest as it analyses a particular judgment of the BGH, but takes a different view with regard to its interpretation than did the OLG Frankfurt.
Interpretation of the BGH ruling
According to the LG Koblenz, the BGH so far has not explicitly dealt with the question in dispute, namely the transferability of loan receivables in view of the principle of banking secrecy. Yet, with reference to a long-standing judgment rendered by the BGH (cf. BGH in WM 1982, pp. 839 et seq. = NJW 1982, pp. 2768 et seq.), the LG Koblenz pointed out that according to existing case law and common bank practice, it is permissible for banks to sell and assign loan receivables of clients who are in default or whose behavior is otherwise unlawful. According to the LG Koblenz, although the BGH has examined the validity of assigning loan receivables it has not imposed any restrictions on, or even noted the potential invalidity of, assignments of loan receivables due to the principle of banking secrecy. Instead, the LG Koblenz pointed out, the BGH would have been expected to mention the potential invalidity of such assignments if it really intended, due to the principle of banking secrecy, such assignments to be permissible only for "special reasons", i.e., permissible only by way of exception. The LG Koblenz continued its reasoning by stressing that the BGH has not overlooked the aspect of the principle of banking secrecy, but has in fact explicitly analyzed the related points and considered them not to be relevant for the assignment of a claim originated under a German law bank contract.
No implicit ruling out of the assignment by the standard business conditions of banks
Unlike the OLG Frankfurt, the LG Koblenz is of the opinion that no mutually agreed implicit prohibition of assignment could be derived from the principle of banking secrecy contained in the standard business conditions of banks. In the LG Koblenz’s view, banks evidently do not have the required intent to commit themselves to such consequences. Moreover, considering the increasing number of borrowers who are insolvent and the growing number of tasks banks need to fulfill, no such intent should in its view be found for that would naturally exclude the possibility of effectively utilizing loan receivables by way of assignment. If the prohibition of assignment was in fact the intention of the banks, it would have been only consequent to include it as such into the standard business conditions of banks.
No prohibition of assignment in view of the conflicting interests of banks and clients
Thus, according to the LG Koblenz, no prohibition of assignment can be deduced simply because the bank’s client qualifies for protection under bank secrecy rules. Such a broad interpretation of the principle of banking secrecy would prevent any transmission of client-related data. Consequently, banks would even, for example, be hindered from judicially enforcing defaulted loan receivables. In addition, banks would be prevented from collecting and utilizing loan receivables as well as disclosing such information during the course of merger & acquisition or outsourcing transactions. Last but not least, it has to be noted that in case of bank insolvency, the insolvency administrator must immediately utilize the assets belonging to the insolvency assets which often requires the quick sale of property and claims. The LG Koblenz points out that the economic effects of a prohibition of assignment according to Section 399 BGB on the credit services sector might be critical without being justified by legitimate interests of the bank clients.
Contrary to the OLG Frankfurt, the LG Koblenz ruled that it might not be useful to split debtors into categories such as those who are worthy of protection due to bank secrecy and those who are not, e.g., debtors who are in default and whose loan receivables may therefore be assigned. Assuming the reasonableness of splitting up the debtors into such categories, however, the LG Koblenz ruled that the interest of a client in default to keep client-related business information secret is outweighed by the preponderant interest of the bank in assigning the loan receivables. Finally, the LG Koblenz noted that it would be difficult to justify awarding a client protection vis-à-vis a financial institution but not in relation to a private creditor who is thinking about assigning such loan receivables. The transmission of information in the sense of Section 402 BGB takes place also when a private creditor is involved and might just not be in the interest of the debtor as if information is transmitted by a bank.
Conclusion
Both decisions, the LG Frankfurt as well as the LG Koblenz decisions, are not yet legally binding. The LG Koblenz judgment was already appealed, but so far no decision has been rendered. Therefore, the issues are not yet finally resolved. However, the decisions rendered correspond to the needs of the financial practice. Both decisions confirm the prevailing view that no contractual prohibition of assignment can be derived from the principle of banking secrecy which could lead to the assignment of the loan receivables being null and void. Should a bank in the individual case in fact violate its obligation to keep client-related business information secret, this might - as the case may be - lead to damage claims only. In addition, the recent decisions show that in case of defaulted loan receivables the interest of the bank in assigning those loans supersedes the interest of the client in default to keep client-related information secret. Finally, the LG Frankfurt stated that a bank could consider complying with the obligation to keep client-related business information secret to limit Section 402 BGB which provides for the assignee the right of information and the right to obtain certain documents. It follows from the foregoing that the principle of banking secrecy neither prohibits
the securitization of loan receivables, if and because they are structured in accordance with the principles laid down in the guideline 4/97 issued by the German regulator Bundesanstalt für Finanzdienstleistungsaufsicht ("BAFin"),
nor does the principle of bank secrecy impose any restrictions regarding the sale of portfolios of loan receivables provided that the contractual rules of the transaction take into consideration the legitimate interests of the clients to keep client-related business information secret. 3 Mayer, Brown, Rowe & Maw LLP Contact
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