Securitisation and Lenders’ Claims. Paul Mitchell and Eva Ferguson . What is securitisation. Take a portfolio of income producing assets (e.g., mortgage loans owned by a bank) – known as “receivables”
Paul Mitchell and Eva Ferguson
bring into account vs “res inter alios acta”
The SPV? But query:
a) Duty of Care?
b) Practicality of Funding?1) Title to Sue
…”;As regards the Substitute Banks
“They became parties to the loan transactions by novation and had transferred to them a pro rata share of BBL’s rights under those transactions, including BBL’s interest in the properties securing the transactions. There was thus transferred from BBL to the syndicate banks a share of the risks inherent in the loan transactions. … The principle of res inter alios acta requires the court to disregard an indemnity received by the plaintiff from a third party in respect of the loss caused by the defendant. It does not require or permit the court to assess damages on the basis of a fiction; to treat losses sustained by third parties as if they have been sustained by the plaintiff. The intervention of the syndicate banks did not indemnify BBL in respect of consequences of entering into the loan transactions. It resulted in the syndicate banks suffering those consequences in place of BBL. The loss claimed by BBL is not loss suffered by BBL prior to syndication, but loss suffered by all the syndicate banks after syndication” per Phillips J
Background result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.
Recent lending practices
The claims being made
Target v Redferns result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.
Bristol & West Building Society v Mothew
Swindle v Harrison
Paragon Finance v ThakerarBackground: last time
Sub-prime result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.
The “NINJA” loan
Buy to let
Lending to securitise
The ever rising(!) property market
Reckless?Background: recent lending
Equitable claims more common than expected result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.
Two types of claim:
Negligence wrapped up as breach of trust / fiduciary duty
“True” equitable claims
Breach of warranty of authority
Breach of undertaking
Barclays Bank v Weeks Legg & DeanThe claims being made
Breach of trust: does the allegation go to the solicitor’s power / authority to deal with the advance?
Breach of fiduciary duty: does the lender allege more than mere incompetence?Liability issues (1)
Theoretically, yes power / authority to deal with the advance?
In practice, no
Weeks, Legg & Dean (above) at 328D-E:
“Theoretically his liability as a trustee is strict, but in practice it is not, for if he acts honestly and reasonably and ought to be excused from liability, the court will grant him relief under section 61 of the Trustee Act 1925.”Liability (2): breach of trust strict?
(1) Negligence a bar to the s.61 defence? power / authority to deal with the advance?
s.727 of the Companies Act 1985
Re D’Jan of London Ltd  1 BCLC 561 at 564
Barings v Coopers & Lybrand  EWHC 1319 (Ch) at paras.1125-48
(2) An all or nothing issue?
(3) How far are terms of the retainer terms of the trust?Liability (3): further trust issues
B applies for a loan, nominating S as his solicitors
The false office purports to be acting for the vendor
S sends the purchase monies, including L’s advance, to the false office and B absconds
L asserts S’s identification obligations are trust obligations and alleges breach of trust, but not negligence
In answer to a s.61 plea, L says that defence is not available because S was negligent
Throughout, L asserts that contributory negligence is not availableLiability (4): an example
Negligence/breach of contract solicitors
Standard Chartered Bank v Pakistan National Shipping
Breach of warranty of authority
Breach of undertaking
Equitable claimsContributory negligence: overview
Equitable nature of breach of trust remedies solicitors
Analogy with the Law Reform (Contributory Negligence) Act 1945, if necessary by reference to Target
S.61 of the Trustee Act 1925
“wholly or partly”Contrib.: breach of trust
Nationwide v Balmer Radmore solicitors
Grounds of attack
The decision itself
The Commonwealth position
The analogy with deceit
Intentionality vs dishonesty
Mothew: “Conduct ... need not be dishonest but it must be intentional.”
FairnessContrib.: breach of fid. duty
What is recklessness? solicitors
Fraser v Furman  1 WLR 898 (employers’ liability):
“... actual recognition ... that a danger exists, and not caring whether or not it is averted. The purpose of the condition is to ensure that the insured will not, because he is covered against the loss by the policy, refrain from taking precautions which he knows ought to be taken.”
Have lenders been reckless?
If so, what impact will that have?Contrib.: recklessness?
Section 1(1): “ solicitorsSubject to the following provisions of this Act, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)”
Section 2(1): “...the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question”
Section 6(1): “A person is liable in respect of any damage for the purposes of this Act if the person who suffered it ...is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust, or otherwise)”The Civil Liability (Contribution) Act 1978 (“The Act”)<Insert Heading>
A, B and C. solicitors
B can only recover from C if he can show that C is liable for the “same damage” as B;
C’s liability with respect to the “same damage” must be a liability to A: it is no good if C’s liability is a liability to someone else;
the amount of contribution recoverable by B depends on what is “just and equitable”;
at that stage you have to have regard to the extent of C’s responsibility for “the damage in question”;
“the damage in question” is the same thing as “the same damage”;
there is an inclusive approach to the kind of liability for that damage concerning which a right to contribution arises.NB:
B has to show: for the “
that it, B, is liable to A in respect of damage suffered by A;
that C would also be liable to pay compensation to A (whatever the basis of that liability);
that C’s liability to A would be with respect to the same damage;
that justice and equity require a contribution to be paid.What has to be proved?
Royal Brompton Hospital NHS Trust v Hammond for the “ 1 WLR 1397 and Co-operative Retail Services Ltd v Taylor Young Partnership Ltd  1 WLR 1419 :
B and C both have to be liable to A for the same damage: if A’s contract with C precludes liability of C to A, then B will not be able to recover a contribution from C;
“same damage” does not mean “same damages”: just because claims for damages with respect to different or overlapping aspects of A’s loss could be made against B and C it does not follow that the respective liabilities are for the “same damage”;
in asking whether parties are liable for the “same damage” the question is whether they are being sued with respect to damage of the same character.Liability for the “same damage”
a matter of legal analysis; for the “
examples: a claim for personal injury against B does not involve the “same damage” as the economic loss flowing from a solicitor’s (C’s) failure to issue the claim in time; a claim against a building contractor for defective work does not involve the same damage as the economic loss flowing from an insurance broker’s failure to procure insurance covering the loss occasioned by that defective work;
Howkins & Harrison v Tyler  Lloyd’s Rep PN 1 probably still good law. In a lender’s claim against solicitors or surveyors there can probably be no contribution claim by the professional against the borrowers. They are not liable for the “same damage”.When is the damage for which B and C are liable of the same character?
A problem: what happens when there is clearly some “ for the “same damage” but the extent of B’s liability to pay damages to A is not commensurate with that of C? What then is the “same damage” concerning which contribution is payable?
B and C are negligent but only C’s loss is ‘capped’ by SAAMCO? Can B seek a contribution with respect to the entirety of the damage for which it was liable to A, or only that part concerning which C is also liable to A?
B is fraudulent and liable for all the damage but C was merely negligent and can plead contributory negligence and remoteness to reduce its liability.
C, but not B, has an effective limitation of liability clause.
A has sustained a loss of £10 million. B is liable for the whole £10 million. C is liable only for £5 million. On an apportionment it is, prima facie, a 50/50 case.
If contribution is available with respect to £10 million then B can recover £5 million from C; conversely, C, if it had paid off A as to £5 million, could then recover nothing from B.
If contribution is available only with respect to £5 million then B can only recover £2.5 million from C and, if C was bringing the claim, C can recover £2.5 million from B.An illustration
B is liable for the whole of A’s loss but C’s liability would be capped by SAAMCO.
Ball v Banner  Lloyd’s Rep PN 569: Solicitors liable to investors for misrepresenting tax-saving scheme. Solicitors seek contribution from valuers whose liability is ‘capped’ by SAAMCO. Held: the total loss the investors could recover from the solicitors represented the “same damage” concerning which there was a right to contribution from the valuers. SAAMCO did not limit the scope of a contribution claim.
Possibly not the last word: see Nationwide Building Society v (1) Dunlop Haywards Ltd; (2) Cobbetts  EWHC 254 at para 64. But also bear in mind that even if there is a right to contribution beyond the SAAMCO cap it is likely a court would not consider it “just and equitable” to order C to pay more than that cap.SAAMCO
All tackled in would be capped by SAAMCO.Nationwide Building Society v (1) Dunlop Haywards (DHL) Limited; (2) Cobbetts
Nationwide lose £££mmm because of the surveyors, DHL’s, deceit, and Cobbetts’ negligence. DHL liable for the entirety of Nationwide’s loss whether or not foreseeable and irrespective of contributory negligence. Cobbetts not liable for remote losses, and have partial defence of contributory negligence, and limitation of liability clause.
Cobbetts settle with Nationwide and seek a contribution from DHL.
What is the “same damage” concerning which a right to contribution arises?Fraud/Contributory negligence/Limitation of liability clauses
Christopher Clarke J: would be capped by SAAMCO.
the “same damage” for which both DHL and Cobbetts were liable excluded the unforeseeable losses for which DHL alone was liable in deceit: that was a distinct category of economic loss concerning which there was no common liability;
the “same damage” included, and both DHL and Cobbetts were prima facie liable to contribute towards, the entire non-remote damage - notwithstanding availability to Cobbetts alone of contributory negligence and the limitation of liability.THE JUDGE HELD...of liability clauses
Section 2(3) of the Act: the liability of C to would be capped by SAAMCO.pay a contribution is capped where his liability to A would have been limited because of a limitation of liability clause or because of a partial defence of contributory negligence.
The court still has to consider what amount it is just and equitable to award by way of contribution under section 2(1) of the Act.IT IS DARKEST JUST BEFORE DAWN...of liability clauses
Section 2(1): would be capped by SAAMCO.
“...the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question”
Causative potency, moral blameworthiness, and the need to disgorge benefits.
Conventionally a % division.
Nothing in the Act to preclude something more sophisticated.A JUST AND EQUITABLE APPORTIONMENT of liability clauses
Christopher Clarke J: would be capped by SAAMCO.
if wrong to regard the unforeseeable losses suffered by Nationwide as not part of the “same damage” they should be excluded at the apportionment stage. That was a loss which Nationwide was only able to recover from DHL because DHL was fraudulent: not fair to require Cobbetts to share in that loss;
for the same reason just and equitable to reduce the sum available for contribution to reflect the fact Cobbetts’ liability was reduced by its defence of contributory negligence;
Nationwide 50% at fault so the amount available for contribution reduced by 50%;
the limitation of liability clause was different: that might cap any contribution payable by Cobbetts but it could not reduce the amount in issue for the purposes of contribution;
next the conventional % apportionment: a split of 80%/20% in Cobbetts’ favour.APPORTIONMENT IN NATIONWIDE CASEAPPORTIONMENTof liability clauses
Amount Cobbetts paid in settlement: £5,585.001. would be capped by SAAMCO.
Nationwide’s entire loss for which DHL was liable as a result of its fraud: £21,049.107.
First identify “same damage” for which Cobbetts was prima facie also liable for contribution purposes(stripping out remote losses but ignoring the limitation of liability clause and contributory negligence available to Cobbetts alone): £13,200,179.
Second, apportion as just and equitable...
In doing so exclude losses Nationwide could have recovered from deceitful DHL but not from Cobbetts because of availability of contributory negligence to Cobbetts: reduces amount available for contribution by 50%: £6,600,090.
No further reduction for the limitation clause capping Cobbets’ liability at £5 million.
Next distribute £6,600,090 80%/20% to reflect culpability/causative potency.
Amount of sharable liability apportioned to Cobbetts is 20% x £6,600,090 = £1,320,018.
Cobbetts paid Nationwide £5,585,001. It had to bear £1,320,018. Therefore entitled to recover £5,585,001 - £1,320,018 = £4,264,893 from DHL.
Simple, isn’t it.AND NOW WITH FIGURES....CASEAPPORTIONMENTof liability clauses
B can recover from C a contribution for costs paid to A: would be capped by SAAMCO.BICC v Cumbrian Industrial Ltd  Lloyd’s Rep PN 526.
B can also recover such a contribution where A has already established an entitlement to costs against both B and C: see Nationwide
Christopher Clarke J:
ordinary case involving two defendants liable to a claimant - apportion the aggregate costs payable to the claimant in accordance with the % apportionment under the Act;
in Nationwide situation different because DHL alone defending case in fraud: amount of costs available for contribution therefore reduced after stripping out such costs;
result: Cobbets also entitled to hefty contribution from DHL for costs paid to Nationwide.A PS: COSTSCASEAPPORTIONMENTof liability clauses