Royal Bank of Scotland Plc v Highland Financial Partners LP

JurisdictionEngland & Wales
JudgeMaurice Kay,Toulson,Aikens L JJ
Judgment Date12 April 2013
CourtCourt of Appeal (Civil Division)
Date12 April 2013

[2013] EWCA Civ 328

Court of Appeal (Civil Division).

Maurice Kay, Toulson and Aikens L JJ.

Royal Bank of Scotland plc
and
Highland Financial Partners LP & Ors.

John Nicholls QC and Louise Hutton (instructed by Linklaters LLP) for the appellant.

Stephen Auld QC, Benjamin Strong and Laurence Emmett (instructed by Cooke, Young & Keidan LLP) for the first to third respondents.

Graham Dunning QC and Jeremy Brier (instructed by DaySparkes) for the fifth respondent.

The following cases were referred to in the judgment:

Ampthill Peerage, TheELR [1977] AC 547.

Armstrong v Sheppard & Short LtdELR [1959] 2 QB 384.

B, Re (Children)ELR [2009] 1 AC 11.

Credit Suisse First Boston (Europe) Ltd v MLC (Bermuda) Ltd [1999] CLC 579.

Cuckmere Brick Co Ltd v Mutual Finance LtdELR [1971] 1 Ch 949.

Dering v Earl of WinchelseaUNK (1787) 1 Cox Eq Cas 318.

Donohue v Armco Inc [2002] CLC 440.

Fiona Trust & Holding Corp v PrivalovUNK [2008] EWHC 1748 (Comm).

Gonthier v Orange Contract Scaffolding LtdUNK [2003] EWCA Civ 873.

Grobbelaar v News Group Newspapers LtdWLR [2002] 1 WLR 3024.

Henderson v HendersonENR (1843) 3 Hare 100.

Johnson v Gore Wood & CoELR [2002] 2 AC 1.

J Willis & Son v WillisUNK [1986] 1 EGLR 62.

Kuwait Airways Corp v Iraqi Airways CorpUNK [2005] EWHC 2524 (Comm).

Meridian Global Funds Management Asia Ltd v Securities CommissionELR [1995] 2 AC 500.

Miles v BullELR [1969] 1 QB 258.

Odyssey (London) Ltd v OIC Run-Off Ltd (Odyssey), Re (unreported, 13 March 2000, CA).

Peruvian Guano (1885) 1 TLR 188.

R v Andrews-Weatherfoil LtdWLR [1972] 1 WLR 118.

Sphere Drake Insurance plc v Orion Insurance Co plc (unreported, 11 February 1999).

Tuvyuhu v Swigi (unreported, 26 October 1998).

Banking — Fraud — Anti-suit injunction — Collateralised debt obligation (CDO) transaction — Bank to finance purchase of portfolio of loans — Transaction never closed by issue of securities because of financial markets crisis — Termination of transaction and liquidation of loans — Bank purchased loans and claimed against respondents for alleged shortfall —“Bids wanted in competition” procedure adopted for sale of loans — Bidding process a sham in relation to some loans which bank had already transferred from trading book to banking book for accounting reasons — Failure to disclose true position — Bank in breach of contract and of equitable obligations as mortgagee — Bank nevertheless obtained judgment for €21 million — Respondents began proceedings in Texas alleging fraud against bank and employees — Bank applied for anti-suit injunction on basis of contractual jurisdiction clause — Respondents counterclaimed to set aside liability judgment as obtained by fraud — Liability and quantum judgments set aside — Anti-suit relief refused on basis of “unclean hands” doctrine — Bank's misconduct sufficiently connected with claim for equitable relief.

This was an appeal by RBS from a judgment of Burton J ([2012] 2 CLC 109) in which he refused to grant anti-suit injunctions to prevent the respondents from continuing proceedings in Texas, and a cross-appeal against the judge's refusal to set aside his earlier grant of summary judgment in favour of RBS on issues of liability.

The first, second and third respondents were associated with the Highland group, a capital management group based in the USA. In 2006 the Highland group planned to launch a collateralised debt obligation (CDO) with an expected aggregate issuance size of €500 million. A special purpose vehicle would issue loan notes secured by a portfolio of loans. RBS was engaged to finance the acquisition of the loans and to market the notes. The arrangements were contained in a mandate letter, a variable funding note purchase agreement and an interim servicing deed (ISD). The issuer gave RBS security in respect of the acquired loans in the form of a debenture.

Clause 4.2 of the ISD provided that if, by the time of the termination date, the closing date (i.e. the issue of the notes etc) had not occurred, then the acquired loans were to be sold in accordance with the terms of that clause. The worsening economic climate meant that the transaction did not close as expected. The mandate was twice extended and Highland gave collateral to RBS under first and second loss deeds. After the collapse of Lehman Brothers in September 2008 it became clear that the transaction would not close. RBS terminated the mandate and the ISD and sought to recover its advances.

RBS organised an auction of the acquired loans by a process referred to as “bids wanted in competition” (BWIC). RBS was entitled to bid and purchased all the loans. It claimed that there remained a shortfall of about €30.5 million, and brought proceedings against the Highland companies to recover it. Burton J granted summary judgment to RBS on issues of liability (see [2010] EWHC 194 (Comm)). An appeal by Highland was dismissed ([2010] EWCA Civ 809).

At the subsequent quantum hearing, the dispute was about what sum should be credited to Highland as a result of the disposal exercise undertaken by RBS under clause 4.2 of the ISD. RBS asserted that all 88 acquired loans had been transferred to RBS in a manner which accorded with its duties under clause

4.2. Highland argued that the auction was a sham because RBS, without telling Highland, had already transferred 36 loans from its trading book to its banking book in order to take advantage of amended International Accounting Standard 39. Highland alleged that that was a breach of RBS's duties under clause 4.2 and as a mortgagee. Highland said that if RBS had acted as it should have done there would have been no shortfall. Burton J held ([2010] EWHC 3119 (Comm)) that RBS had transferred the 36 loans to its banking book before the BWIC auction and it had therefore failed to operate clause 4.2(a)(iii) of the ISD in accordance with its terms and failed in its duty as mortgagee. However, a proper valuation of the loans still left a shortfall and RBS was entitled to judgment in the sum of €21 million.

The second respondent and the fifth respondent, as assignee, then began litigation in Texas alleging fraud against RBS and two of its employees. RBS applied for an anti-suit injunction, alleging that the Texas proceedings were vexatious and oppressive. The Highland parties counterclaimed to set aside the liability judgment as having been obtained by fraud.

Burton J confirmed his conclusion that RBS had suppressed the fact that, in order to take advantage of IAS 39, the 36 loans had been transferred by RBS from its trading book to its banking book before the BWIC. He held that, although that fact had been deliberately concealed, that had not been the result of dishonesty. He declined to set aside the liability judgment because he was satisfied that the outcome of the quantum judgment was correct.

Burton J held that the first loss deed contained an exclusive jurisdiction provision which bound the Highland parties. However, the fact that RBS had “unclean hands” was a strong reason why the court should not grant an injunction enforcing the exclusive jurisdiction clause in favour of RBS.

RBS appealed against the refusal to grant an anti-suit injunction and Highland cross-appealed against the refusal to set aside the liability judgment.

Held, dismissing RBS's appeal and allowing Highland's cross-appeal:

1. On the judge's findings RBS did more than suppress facts. There was more than simple deliberate concealment of “the suppressed fact”. The evidence and the findings of the judge overall led to the inevitable conclusion that at the time of the liability hearing and judgment RBS, by its employee SG, was positively misleading both Highland and the court as to what had happened in relation to the 36 loans and was doing so consciously and deliberately. Contrary to the judge's view, the failure to disclose the suppressed fact at the time of the liability hearing was dishonest. There was ample material on which to conclude that but for the deliberate, conscious and dishonest misstatement or concealment there would have been no summary judgment on liability in favour of RBS because none would have been applied for. It followed that the liability judgment had to be set aside as having been obtained by the fraud of RBS. It would be unjust to permit RBS to have the fruits of the quantum judgment, even though obtained on the full facts, if it would not have had that advantage if the full facts had been revealed when they should have been. The Court of Appeal judgment on liability and the quantum judgment had also to be set aside.

2. The misconduct of SG was attributable to RBS for the purposes of the “unclean hands” doctrine. He was RBS's key witness in respect of the allegation of unclean hands and the allegation that the liability judgment had been obtained by fraud. The judge was entitled to conclude that there was a sufficient “immediate and necessary” relation between the misconduct of SG and the claim by RBS for equitable relief in the form of an anti-suit injunction, such that RBS was to be denied that relief under the “unclean hands” doctrine. However, there was a good argument that the Highland parties were bound by and in breach of an exclusive jurisdiction clause in favour of the English courts, where the remedy of multiple and punitive damages would not be available. Therefore, at least until that issue was finally decided, the Highland parties should be kept to their undertakings not to seek multiple or punitive damages against the defendants in the Texas proceedings. (Odyssey (London) Ltd v OIC Run-Off Ltd (Odyssey), Re (unreported, 13 March 2000, CA) applied.)

JUDGMENT

Aikens Lj: I. Brief history of how the litigation arises

1. Sometimes an attempt to alleviate problems has unexpected consequences. This case is a tale of the consequences of actions taken by employees of the Royal Bank of Scotland (“RBS”) who used a change in the International Accounting...

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