Deutsche Trustee Company Ltd v Cheyne Capital (Management) UK (LLP) and Another
| Jurisdiction | England & Wales |
| Judge | The Hon Mr Justice Arnold,Mr Justice Arnold |
| Judgment Date | 31 July 2015 |
| Neutral Citation | [2015] EWHC 2282 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC2015-000614 |
| Date | 31 July 2015 |
[2015] EWHC 2282 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building
Fetter Lane, London, EC4A 1NLL
The Hon Mr Justice Arnold
Case No: HC2015-000614
Robin Dicker QC (instructed by Clifford Chance LLP) for the Claimant
Gabriel Moss QC (instructed by Sidley Austin LLP) for the First Defendant
Jeremy Goldring QC (instructed by Reed Smith LLP) for the Second Defendant
Hearing date: 28 July 2015
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is a Part 8 claim for the determination of an issue of interpretation of clause 26.4(b) of a servicing agreement which is part of the documentation relating to a commercial mortgage-backed securitisation transaction ("the Transaction"). The Claimant ("the Trustee") is the Note Trustee and Issuer Security Trustee in relation to certain notes ("the Notes") issued by the Second Defendant ("the Issuer") as part of the Transaction. The Trustee has no commercial interest in the outcome, but seeks the assistance of the Court. The First Defendant ("Cheyne") acts as Operating Advisor for the Class G Noteholders. Cheyne advances one interpretation of clause 26.4(b). The Trustee has agreed to advance an alternative interpretation. The Issuer also has no commercial interest in the outcome, and has stayed neutral.
The facts
Sensibly, the parties prepared a Statement of Agreed Facts before the claim was issued, and subsequently a Statement of Further Agreed Facts. The only evidence filed was two brief, formal witness statements. My account is substantially based on the agreed Statements, supplemented by additional references to the Transaction documents from the parties' skeleton arguments.
Commercial mortgage-backed securities
CMBS transactions are securitisations which, in broad terms, involve the acquisition of one or more loans secured upon income-generating commercial real estate, by a special purpose vehicle (in these proceedings, the Issuer), which funds the acquisition of the loan(s) through the issuance of notes to debt capital market investors.
Payments of interest on, and repayments of principal in respect of, the notes are typically funded through payments of interest on and repayments of principal in respect of the loan(s). Such payments are typically funded by the cash-flow generated by the relevant commercial real estate.
Notes in CMBS transactions are typically issued in multiple classes. The allocation of principal receipts on the loan(s) towards payments of principal on the notes is typically governed by complex rules that, in a pre-loan default situation, allocate loan principal receipts to the various classes of notes partly on a sequential basis and partly on a pro-rata basis but, following a loan default, on a fully sequential basis, with the most senior class of notes being paid first in priority and the most subordinate class of notes being paid last in priority. "Sequential" means that the relevant amount is allocated to the most senior class of notes first until it has been redeemed in full, then to the next most senior class of notes until it has been redeemed in full and so on until the relevant amount has been fully allocated. "Pro-rata" means that the relevant amount is allocated among all classes proportionally (based on their principal amount outstanding as a proportion of the aggregate principal amount outstanding of all classes of notes) meaning that each class of notes will receive a proportionate share of the relevant amount. Principal losses on the loan(s) are therefore allocated reverse-sequentially, with the most senior class of notes being the least risky and the subordinated class of notes being the most risky from a credit perspective. "Reverse-sequentially" means that the relevant losses are allocated to the outstanding principal amount of most subordinate class of notes first until it has been reduced to zero, then to the next most subordinated class of notes until its principal amount outstanding has been reduced to zero and so on until the relevant loss has been fully allocated.
The role of a special servicer
The issuer in a CMBS transaction (such as the Issuer) is typically an orphan special purpose vehicle without employees to manage the loan exposures. The management of the loans is therefore outsourced to a third party service provider (in the Transaction, the "Issuer Servicer") pursuant to a loan servicing agreement (in the Transaction, the "Issuer Servicing Agreement"). So long as the loans perform in the manner that they are expected to (i.e. there is no default), the management of the loans is relatively limited, typically only involving cash collections, information gathering and reporting and responding to borrower requests for waivers and consents in a pre-default scenario.
When a loan in a CMBS transaction suffers a default which constitutes a trigger event for the purposes of the loan servicing arrangements (identified in the Transaction documents as a "Special Servicing Transfer Event"), however, the responsibility for the active management of such loan, and the resolution of that default, passes into the hands of a specialist loan work-out/resolution service provider known as a special servicer (in the Transaction, the "Issuer Special Servicer").
The special servicer is required to determine the options available to it for resolving such default and, from those options, select and implement the one that maximises recoveries in respect of the defaulted loan. Such resolution strategy may involve agreeing a consensual restructuring of the loan with the relevant borrower so that the loan becomes a performing loan once again. If a consensual restructuring is not possible or appropriate, however, the special servicer would need to consider loan security enforcement strategies with a view to maximising recoveries.
The Transaction Documents
The rights and obligations of the parties involved in the Transaction are set out in a suite of interlocking documents entered into on 28 June 2007 ("the Transaction Documents"). The principal Transaction Documents for present purposes are as follows:
i) a note trust deed made between the Issuer and the Trustee ("the Trust Deed");
ii) a deed of charge and assignment made between, amongst others, the Issuer and the Trustee ("the Deed of Charge");
iii) a servicing agreement made between, amongst others, the Issuer, the Trustee, the Originator (as defined below) and Hatfield Philips International Ltd ("HPI" or "the Issuer Special Servicer") ("the Issuer Servicing Agreement"); and
iv) a master definitions and construction schedule ("the Master Definitions Schedule").
Each of the Transaction Documents is expressly governed by English law and contains a jurisdiction clause in favour of the courts of England and Wales.
The Transaction
The Notes were part of a financing structure relating to ten Euro-denominated loans made to borrowers in Germany, Switzerland and Austria ("the Loans"). The Loans provided an income stream to pay principal and interest on the Notes. The originator in respect of the Loans was Deutsche Bank AG, London Branch ("the Originator").
At the time of issue of the Notes in June 2007, a portion of the Originator's interest in certain of the Loans was sold to the Issuer by way of loan sale agreements. The sale incorporated a transfer of the Originator's corresponding interest in the assets securing these Loans. The interest in the remaining portion of certain of the Loans and the corresponding interest in the related security were retained by the relevant original lender and the Originator.
The Issuer granted security over, amongst other assets, the Loans, for its obligations in respect of the Notes. Security was granted pursuant to the Deed of Charge.
The Notes
The Notes are Euro-denominated commercial mortgage floating rate notes (except that Class X bears interest at a variable rate) in the total sum of €1,445,342,232, with a final maturity date of April 2018. As set out in the following table, the Notes fell into ten classes, from Class A1 to Class G in descending order of priority:
| Class | Initial Principal Amount | Rating Fitch/Moody's/S&P |
| A1 | €698,500,000 | AAA/Aaa/AAA |
| X | €50,000 | AAA/NR/AAA |
| A2 | €299,300,000 | AAA/Aaa/AAA |
| A3 | €149,650,000 | AAA/NR/AAA |
| B | €87,800,000 | AA/NR/AA |
| C | €89,300,000 | A/NR/A |
| D | €57,550,000 | BBB+/NR/BBB+ |
| E | €21,750,000 | BBB/NR/BBB |
| F | €21,950,000 | NR/NR/BBB- |
| G | €19,492,232 | NR/NR/BB |
Each class was rated by one or more of three rating agencies (the "Rating Agencies" as defined in the Master Definitions Schedule): Moody's Investors Services Ltd (" Moody's"), Standard & Poor's Rating Services, a division of the McGraw-Hill Companies, Inc ("S&P") and Fitch Ratings Ltd ("Fitch"). "NR" in the table above means not rated.
As would be expected, the more junior notes, with lower ratings, paid a higher margin over the applicable base interest rate (EURIBOR), than the more senior notes. So the Class A1 Notes paid a margin of 0.16% over EURIBOR, while the more speculative Class G Notes paid a margin of 3.25% over EURIBOR.
The relative priority of the more senior classes of Notes over the more junior classes is reflected, in the usual way, in various provisions of the Transaction Documents. For example:
i) Clause 6 of the Deed of Charge deals with the Pre-enforcement and Post-enforcement Priority of Payments. It provides for payments of interest and...
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