Natwest Market NV v CMIS Nederland BV

Hearing dates: 25 and 26 July 2024

Nigel Cooper KC:

Introduction

In this action, the Claimants seek declarations in respect of sums said to be due to them, and for payment of the said sums, under seven Deeds of Indemnity (“the Deeds”) granted by the Defendants. The Defendants deny any liability to the Claimants and also seek declaratory relief by way of counterclaim confirming that they have no such liability. Except where it is necessary to distinguish between the individual Claimants and the individual Defendants, I will refer to the Claimants collectively as NWM and the Defendants collectively as CMIS.

The Deeds were granted by CMIS between May 2006 and April 2008 and were granted in respect of certain amounts that might become payable to NWM under certain swap transactions between NWM and certain securitisation special-purpose vehicles established by CMIS (defined below as the EMAC Issuers).

The dispute between the parties principally turns on the construction of the relevant agreements. I was provided with witness statements from:

i) Mr. Sachin Arvind Zodgekar and Mr. Jean-Paul Westgate on behalf of NWM.

ii) Mr. Sean Joseph Daly on behalf of CMIS.

None of the above witnesses were called to give evidence orally and none have direct knowledge of the making of the relevant agreements. Indeed, none of them were employed by the party on which behalf they gave evidence at the time when the relevant agreements were made. While their evidence was helpful in explaining the structure and background of the transactions which are at the heart of the present dispute, none of the witnesses could give first-hand evidence as to the reasons for particular features of the transaction structure, such as, for example, the purpose of the Deeds. To the extent that witnesses speculated as to those reasons, I prefer to have regard to the provisions of the relevant agreements, including their recitals, as being the more reliable guide as to the commercial purpose of the agreements. In any event, as CMIS put it in their skeleton argument, there is little to be gained by speculating as to the true commercial purpose of the parties.

Background

The background below is largely taken from the Agreed Common Ground provided by the parties supplemented by the factual accounts set out in the parties' skeleton arguments as verified by the documents in evidence before me.

Parties

The First Claimant (“NWM NV”) is a company incorporated in the Netherlands. The Second Claimant (“NWM PLC”) is a public limited company incorporated in England. NWM NV and NWM PLC (together “NWM”) are part of an international banking group which provided and provides hedging structures for mortgage-backed securitisations.

The First Defendant (“CMIS NBV”) and the Second Defendant (“CMIS IBV”) (together “CMIS”) are companies incorporated in the Netherlands. CMIS' primary business is and was the provision of mortgages in the Netherlands (with CMIS NBV being the originator) and Germany (with CMIS IBV being the originator). To give an indication of the scale of the transactions involved, CMIS NBV was the provider of the Dutch mortgages, originating approximately €10 billion of mortgages in the Dutch market from 2000 to 2008.

In 2010, the shares in each of the CMIS parties were sold to an investment fund managed by Fortress Investment Group. Following the sale, CMIS NBV has effectively been in a state of run-off. Its main function is to continue providing the administrative services that it is contractually required to provide in respect of the 22 securitisation structures referred to above. CMIS submits that, as a consequence, it does not have the funds to pay the sums now claimed by NWM and will seek counter-indemnities from the relevant EMAC Issuers (as defined below).

The EMAC Securitisations

CMIS' mortgage business was funded by the mortgage-backed securitisation market. Between 2006 and 2008, CMIS established a series of securitisation special-purpose vehicles (collectively “the EMAC Issuers”). Each EMAC Issuer entered into an “EMAC Securitisation”, the purpose of which was to purchase mortgage receivables originated by CMIS. The purchase price for these mortgage receivables was funded by the EMAC Issuer issuing rated floating rate notes, (“the Notes”) to investors (“the Noteholders”). This action is concerned with seven of the EMAC Securitisations shown in the table below.

Securitisations 1, 2, 4, 5, 6 and 7 relate to Dutch mortgages (“the NL Securitisations”) while Securitisation 3 relates to German mortgages (“the DE Securitisation”).

The mortgage receivables for each Securitisation (“the Mortgage Receivables”) were sold and assigned to the EMAC Issuers by the “Sellers” who were the entities which had originally provided (or otherwise came to have an interest in) the residential mortgage loans to which the Mortgage Receivables related (“the Mortgage Loans”). CMIS was the principal originator. The Mortgage Receivables constituted all rights of the Sellers under the Mortgage Loans including the right to receive the underlying borrowers' payments of interest and repayments of principal under the Mortgage Loans. As part of the issuance of the Notes, the assets of the EMAC Issuers (principally the Mortgage Receivables) were secured in favour of the Noteholders. Other secured parties included NWM as counterparty to the “Swaps” referred to below.

Pursuant to the terms of the Notes, the EMAC Issuers were obliged to pay floating rate interest at a rate referrable to EURIBOR, to holders of the Notes (“the Noteholders”) on specified quarterly payment dates. The intention was that the EMAC Issuer would use the funds it received from the Mortgage Receivables to make payments of interest and principal under the Notes to the Noteholders. The interest payable under the Notes was referrable to EURIBOR and so could vary with the EURIBOR market rate. By contrast, the Mortgage Loans for each Securitisation were mostly fixed-rate mortgages. The transaction structure created the possibility that, due to a change in interest rates, there could be a cash-flow mismatch between the interest received by the EMAC Issuers pursuant to the Mortgage Receivables and the interest payable by the EMAC Issuers pursuant to the Notes.

This potential exposure was intended to be hedged by the Swaps thereby allowing CMIS to achieve AAA ratings on the Notes. In order to achieve these AAA ratings, the hedging for the Securitisations was structured such that certain payments to NWM under the Swaps were subordinated to the interests of the Noteholders (“the Swap Subordinated Amounts”). In other words, in respect of the Swap Subordinated Amounts, NWM was not very senior in the waterfall of payment priorities in respect of the liabilities of the relevant EMAC Issuer provided for in the security documentation for the Securitisations (“the Payments Waterfall”). It was the risk of non-payment by the EMAC Issuers in certain circumstances which was transferred to CMIS under the Deeds.

The principal documents for each of the Securitisations are described further below.

Prospectuses

For each of the Securitisations, a Prospectus was issued describing the structure, the risk factors, the parties, the securitised assets and the terms and conditions of the Notes:

Trust Deeds and Issuer Trust Agreement

For each of the six NL Securitisations, the security granted by each EMAC Issuer in relation to the Mortgage Receivables was granted to a Security Trustee appointed by a Trust Deed; for Securitisation 3, the equivalent agreement was an Issuer Trust Agreement:

The Trust Deeds (by clause 5.3) and the Issuer Trust Agreement (by clause 9.1) provided for the Payments Waterfall in respect of the liabilities of each EMAC Issuer described above. The Swap Subordinated Amounts to be paid to NWM appear at item (j) in a waterfall, which consists of items (a) to (n).

The Trust Deeds also provided (by clause 4.8) that neither...