Credit Suisse Asset Management LLC v (1) Titan Europe 2006-1 P.L.C. (1st Respondent) (2) U.S. Bank Trustees Ltd (2nd Respondent) (3) Elavon Financial Services Ltd (3rd Respondent) (4) Attestor Value Master Fund LP (4th Respondent)
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Underhill,Lord Justice Briggs |
| Judgment Date | 20 December 2016 |
| Neutral Citation | [2016] EWCA Civ 1293 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2016/2026 & 2025 & 2024 &2027 |
| Date | 20 December 2016 |
[2016] EWCA Civ 1293
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
The Chancellor of the High Court
HC 2015-004155
Royal Courts of Justice
Strand, London, WC2A 2LL
Lady Justice Arden
Lord Justice Underhill
and
Lord Justice Briggs
Case No: A3/2016/2026 & 2025 & 2024 &2027
Ben Strong QC (instructed by Sidley Austin LLP) for the Appellant
Stephen Robins (instructed by Reed Smith LLP) for the 1 st Respondent
Alexander Cook (instructed by K & L Gates LLP) for the 2 nd Respondent
Jeremy Goldring QC and Andrew de Mestre (instructed by Allen & Overy LLP) for the 3 rd Respondent
Sue Prevezer QC and Alex Barden (instructed by Quinn Emanuel Urquhart and Sullivan LLP) for the 4 th Respondent
Hearing date: 13 th October 2016
Approved Judgment
Issue: extent of interest entitlement of Class X Notes of Titan
This appeal is about the extent of the interest entitlement of the Class X Notes issued by the first respondent ("Titan") as part of a commercial mortgage-backed securitisation ("CMBS"). The Class X Notes are one of a series of ten classes of Notes consisting of Classes A to H, Class X and Class V. The aggregate nominal amount of the Notes exceeds €723m. The appeal involves the interpretation of the terms and conditions ("Ts & Cs") applying to all classes of the Notes and setting out the rights of each class. The right of the Class X Notes to interest is different from that of other classes of the Notes and, as it has priority for payment of interest and capital over all other classes of the Notes other than Class A, the extent of its entitlement will affect other classes of Notes. We are not concerned with the Class V Notes, nor are we concerned with the actions which have been heard with the first action as the issues in this case will decide the issues in those cases also.
Titan is a special purpose corporate vehicle (a "SPV") which was set up to acquire a portfolio of commercial loans ("underlying loans"), secured on property, from Credit Suisse International ("the originator"). They carry a fixed rate of interest save for one loan on which ordinarily interest is payable at Euribor plus 1.7% p.a.. Titan bought the portfolio out of the monies raised by the issue of the Notes in 2006. The originator issued a prospectus ("the Offering Circular"), and the subscribers of the original Notes made their decision to invest in the Notes in the light of this document. Classes A to H of the Notes have a fixed rate coupon. That coupon is less than interest payable on the underlying loans, so on paper at least Titan makes a profit. The Class X Notes enable the originator to retain the right to a share of that profit. Consistently with this purpose, the nominal amount of the Class X Notes is small: the originator subscribed a mere €50,000 for the Class X Notes. The current holder of the Class X notes is Credit Suisse Securitised Products Master Fund Limited, (the "Fund") a Cayman entity which is the sole or partial holder of the Class X Notes in each of the Appeals. The appellant, Credit Suisse Asset Management LLC ("CSAM"), is the investment manager for, and acts on behalf of, the Fund.
So the Class X Notes essentially entitle the holders to the payment by Titan, subject to the payment of certain administrative expenses, of the difference between the rate of interest payable by the borrowers to Titan and the interest payable on the Class A to H Notes. This structure is not uncommon, and the difference is known as the "excess spread," but there is no established formula for the entitlement of Class X Notes: see generally Nassar Hussain, Legacy of European CRE Lending, The Lessons Learned During The Downturn and CMBS 2.0 Commercial Mortgage Loans and CMBS: Developments in the European Market (second edition, Sweet & Maxwell, 2012) ed. AV Peterson at pages 90 to 91, and K. Betz-Vais, The Loan Origination Process in the third edition (Sweet & Maxwell, 2016) at pages 80 to 81. The issue on this appeal is, put simply, whether, in calculating the rate of interest payable by the borrowers to Titan for this purpose, account is taken only of the interest rate ("the ordinary interest rate") ordinarily payable by the borrower or whether it includes the additional interest ("default interest") payable under the terms of the underlying loans because of some breach of their terms. I will call the first interpretation the "ordinary interest only interpretation" and the latter interpretation "the default interest interpretation". If the latter interpretation is correct, CSAM receives more than it otherwise would, and less will be available for distribution to the holders of the other classes of Notes than under the ordinary interest only interpretation because the funds available to the Class A to H Noteholders are reduced by making a larger payment to CSAM.
For the reasons given below, I conclude that the ordinary interest only interpretation is correct on the natural meaning of the language used, and that that result is compatible with the commercial logic of the transaction. I have reached the same conclusion as the Chancellor did in his judgment dated 28 April 2016, from which CSAM now appeals, though in part using different reasoning as I shall explain below. The judgment proceeds by summarising the background (the documentation used for the CMBS, explaining the significance of Titan being an "orphan" vehicle, summarising the relevant provisions about the Class X Interest Rate), and the principal points made by the Chancellor, and then by discussing the key reasons for my conclusion.
While the borrowers were not in default at the date the Notes were issued, there was substantial default by the borrowers following the global financial crisis in 2008. Titan now has insufficient funds to pay all the interest due on the Notes. Where borrowers have defaulted or become insolvent, Titan's funds also stand to be further reduced by extra fees it has to pay for servicing the underlying loans, and liquidation fees.
Documentation supporting the issue of the Notes
I have summarised this in Appendix 1 to this judgment.
Crucial and significant characteristic of the SPV
The originator set Titan up to be totally independent of it: as the term goes, it is an "orphan" vehicle. It is ultimately owned by charitable trusts. This is not unusual in a CMBS. It is commonly done so that the originator does not have to show the loans in its financial statements with implications for its capital ratios.
This means that any surplus remaining in Titan after it has paid all the payments which it needs to make on the Notes, and its other liabilities, goes to charity.
CSAM contends that as a commercial matter an interpretation which avoids this result is to be preferred.
Numerator used for determining interest entitlement of the Class X Notes
I stated at the outset of this judgment that the Class X Notes essentially entitled the holders, subject to the payment of certain administrative expenses, to interest representing the difference between the rate of interest payable by the borrowers to Titan on the underlying loans, and the interest payable on the Class A to H Notes, i.e. the Notes other than the Class X and Class V Notes. The machinery that achieves this purpose is in condition 5 of the Ts & Cs, and it is complex. Under condition 5(c) of the Ts & Cs, the Class X Notes are entitled to interest at "the Class X Interest Rate". This has to be calculated by the Agent Bank for every Payment Date. The Class X Interest Rate for any Payment Date is a "per annum interest rate" to be determined by a particular fraction. Not all the details of the fraction need to be considered on this appeal. The important feature of the fraction for present purposes is its numerator, which is the product of (i) the principal due on the underlying loans at the end of the interest period on the loans next before the payment of interest on the Class X Notes and (ii) "the Class X Net Weighted Average Strip Rate" ("the Strip Rate"). The denominator was the nominal amount of the Class X Notes.
The relevant provision reads:
The "Class X Interest Rate" for any Payment Date is a per annum rate expressed as a percentage calculated as follows: (a) the product of: (i) the aggregate outstanding principal balance of the Loans as at the beginning of the related Interest Accrual Period expiring immediately before such Payment Date and (ii) the Class X Net Weighted Average Strip Rate, divided by (b) the Principal Amount Outstanding on the Class X Notes immediately before such Payment Date.
The Strip Rate is separately defined. It also refers to the interest rate as a "per annum rate". The definition goes on to refer to the Net WAC Rate which is also separately defined. That definition uses the expression "Net Mortgage Rate", which is also separately defined and also refers to the "per annum interest rate". The three definitions (referred to below as "the three definitions"), in the order in which they appear in the Ts & Cs, are as follows:
The "Class X Net Weighed Average Strip Rate" with respect to any Payment Date will be a per annum rate equal to the excess, if any, of (x) the Net WAC Rate for the related Interest Accrual Period over (y) the weighted average of...
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