Royal Bank of Scotland Plc v Highland Financial Partners LP and Others
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BURTON,Mr Justice Burton |
| Judgment Date | 07 December 2010 |
| Neutral Citation | [2010] EWHC 3119 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2009 Folio 605 |
| Date | 07 December 2010 |
[2010] EWHC 3119 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Before: Mr Justice Burton
Case No: 2009 Folio 605
MR ADAM JOHNSON AND MS KERRY STARES (both of Herbert Smith LLP) for the Claimants
MR STEPHEN AULD QC AND MR BENJAMIN STRONG (instructed by Cooke, Young & Keidan) for the Defendants
Hearing dates: 14, 15, 16, 17 September and 6 October 2010
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.
Mr Justice Burton:
This has been a hearing to assess quantum in the light of the summary judgment I granted to the Claimants (“RBS”) on 10 February 2010 ( [2010] EWHC 194 (Comm)) (the “Liability Judgment”), as upheld by the Court of Appeal on 14 July 2010 ( [2010] EWCA Civ 809), against the Second and Third Defendants (“Highland”) as borrowers and the First Defendant as guarantor. I do not propose to rehearse the full history of the Collateralised Debt Obligation transaction (“CDO”) between RBS and Highland which led to such judgment, for details of which I refer to the Liability Judgment. Suffice it to say that I concluded that there had been lawful termination by RBS on 31 October 2008 of the relationship between them and Highland constituted by a Mandate Letter (as amended on 25 March 2008) and the Interim Servicing Deed (“ISD”) between them dated 5 April 2007, such as to terminate the arrangements whereby Highland borrowed from RBS via a Special Purpose Vehicle or SPV (“the Issuer”) funds for the purpose of acquiring a portfolio or 'Warehouse' of Loans, with a view to issuing, to subscribing third parties, securities, for which those Loans would be collateral.
Unfortunately the autumn 2008 financial crash ended any chance of public interest in such securities, and, after two extensions of the proposed closing date, and the provision of substantial collateral by Highland, RBS served notice pursuant to the Mandate Letter and the ISD, triggering the repayment provisions of the ISD. Thereafter RBS purported to operate those provisions so as to liquidate the existing loans, in part by selling them to third parties and in part by purchasing them themselves, and to set off against the outstanding balance of advances by RBS the sums credited in respect of such disposal, leaving a shortfall calculated by RBS as some €35m.
There is no dispute about the outstanding balance of the advances. The dispute arises in respect of the sum which RBS has sought to credit against it. RBS asserts that it has correctly operated the provisions of Clause 4.2 of the ISD (to which I shall turn) and is not in breach of any obligation. Highland claim that RBS has not correctly operated the terms of that Clause, and is in breach of its equitable obligations as mortgagee, which are implied into or inform its obligations under Clause 4.2, such that Highland deny that, on a proper accounting, had RBS not been in breach of its obligations, any sum would be or is due, or indeed assert that monies would be or are owed by RBS. Each side called two expert witnesses, one as to valuation and the workings of the syndicated loan market, Mr Michael Constant for Highland and Mr Simon Hood for RBS, and one in relation to accounting treatment, Mr David Lawler for the Defendant and Mr Peter Chidgey for RBS. RBS called one factual witness live, Mr Sam Griffiths, who was the RBS leveraged loan trader responsible for the Highland portfolio at the material time, and one whose statement was read, namely Mr Simon Lowe, the then Global Controller, Credit Markets, for RBS, responsible for relevant accounting treatment. Highland called no factual witnesses, and the examination has been simply of the conduct and performance of RBS. The trial lasted four full days (after reading time) between 14 and 17 September, and then a day's oral submissions, after delivery of written arguments, on 6 October 2010, which was followed by further written submissions from the parties on 12 and 15 October. I have been greatly assisted by Mr Johnson and Ms Stares, of Herbert Smith, for RBS, and Mr Auld QC and Mr Strong for Highland.
The only material clause of the amended Mandate Letter relied upon before me (by RBS) provides simply that “[RBS] agrees that, subject to obtaining its internal approval, the [Second and Third Defendants] will participate in the risk of the Warehouse Facility. If the transaction does not close, the economics will be 7.5% for the account of [the Third Defendant] and 92.5% for the account of [the Second Defendant].” So far as that is concerned, there is no doubt that 100% of the loss (if any) resulting from the transaction is to be carried by Highland. The issue is how that loss (if any) is calculated.
The crucial provision of the ISD, which took centre stage before me, is Clause 4.2, headed “No Closing Date”, i.e. it arose in the event that, as in fact occurred, the contractual arrangements between the parties came to an end without there having been a closing date when the securities were issued to the public (from which it was intended that RBS would have been repaid). In quoting such clause, I shall substitute “Highland” for the “Interim Servicer”, and “RBS” for the “Funding Note Holder”. The “Acquired Loans” referred to are, in the event, the 88 Loans which had been acquired by the Issuer with funds advanced by RBS, and which were now to be disposed of so as to fund and enable repayment to RBS upon the termination, there having been no Closing Date:
“4.2 If the Closing Date does not occur on or prior to the Termination Date the Acquired Loans shall be sold in accordance with the provisions set out below:
(a) [Highland] shall have the right to purchase all Acquired Loans from the Issuer at market prices as determined by readily available quotes from independent, internationally recognised broker/dealers on commercially reasonable terms so long as there is no loss to the Loan Portfolio or as otherwise agreed between the parties, provided that in respect of any Acquired Loans not sold or agreed to be sold by the Issuer to [Highland] within 3 Business Days of the Termination Date, [RBS] will have the option to direct the Issuer to sell one or more of the Acquired Loans remaining in the Portfolio in such manner as specified below and as [RBS] shall determine in a commercially reasonable manner, which (for the avoidance of doubt) may include a sale of any such Acquired Loans to [RBS] or (if [Highland] so agrees) [Highland] at a price equal to the sum of the market values for such Acquired Loans provided:
(i) if both [RBS] and [Highland] wish to purchase an Acquired Loan, then the party that makes the higher bid thereof shall purchase such Acquired Loan at such price;
(ii) if both [RBS] and [Highland] wish to purchase an Acquired Loan and both offer the same price thereof, then [Highland] shall purchase 100 per cent of such Acquired Loan at such price;
(iii) if neither [RBS] nor [Highland] wish to purchase an Acquired Loan, then such Acquired Loan will be sold in accordance with the procedures (i) mutually agreed between [RBS] and [Highland] within 5 Business Days, or else [(ii)] determined by [RBS] acting in a commercially reasonable manner.
…
(c) if the actions specified in this clause 4.2 above are not completed to the commercially reasonable satisfaction of [RBS] within 30 calendar days after the Termination Date in the event of the occurrence of any event specified in paragraphs (b), (c) or (e) of the definition of Termination Date, an event of default shall be deemed to have occurred under the Variable Funding Note and [RBS] is hereby authorised to take whatever action it determines appropriate to sell each of the Acquired Loans still held by the Issuer.”
The following clarifications should be made at this stage:
i) There is a definition of “Market Value” in Clause 1.1 of the ISD: as can be seen above, the words used in Clause 4.2(a) are “market values” (with no capital letters). The words “Market Value” are used in the ISD only in Clause 4.1, which relates to removal of Acquired Loans from the portfolio during the subsistence of the ISD. There is a dispute between the parties as to how far the definition of Market Value assists in the construction of “market values” in Clause 4.2.
ii) The words “or else” in Clause 4.2(a) (iii) seem to me plainly (and the contrary was not argued) to mean “or in the absence of such mutual agreement”.
iii) The provisions of Clause 4.2(c) only arise where termination was as a result of the occurrence of one of the events therein specified, and it is common ground that none of those apply, so that the 30-day period does not arise. There is again a dispute between the parties as to whether such 30-day provision has any relevance in relation to the events which happened.
iv) It is common ground that RBS was in effect mortgagee of the Loans and in a position to procure them to be sold, so as to recover debts owed to it. There is no doubt that, unlike the normal position in equity of a mortgagee who would not be entitled to purchase the mortgaged property itself, Clause 4.2 expressly enables such to occur, in accordance with its terms, and, although there was some discussion early in the hearing, I am satisfied that the “avoidance of doubt” provision means that it may (notwithstanding) be commercially reasonable for the loans to be sold to RBS, not that such sale is automatically commercially reasonable. Subject to that important difference, it is also common ground that (a) the equitable duties of...
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