Titan wins the battle of title to sue but loses the war
Titan Europe 2006-3PLC v Colliers International UK Plc
For the first time the court has reached the view that an issuer of commercial mortgage backed securities (Titan) has the legal standing to bring a claim of negligence against a valuer (Colliers), even though it was the originator (here Credit Suisse) who instructed the valuer and obtained the valuation report. Here we discuss the significance of the Court of Appeal’s approach to deciding upon who has title to sue and to the application of the principles for assessing core liability in an over valuation claim.
In 2005 Colliers, instructed by Credit Suisse, valued a commercial property in Nuremberg, Germany at €135 million. On the strength of that valuation, Credit Suisse lent €110 million to the freeholder, Valbonne. Approximately €99 million of the loan was transferred to Titan, a Special Purpose Vehicle (SPV) created by Credit Suisse, who in turn issued commercial mortgage backed securities (CMBS) to note holders with a value of around €1 billion secured against a number of properties, including the Nuremberg property. In 2009 the tenant of the property, the German mail order company Quelle, became insolvent and Valbonne defaulted on the loan. It is understood Valbonne’s administrator sold the property for €22.5 million in 2014.
First instance findings
Titan alleged the Colliers’ valuation significantly over valued the property and was therefore negligent. It asserted that it had the right as issuer of the CMBS to make a direct claim against Colliers; that it relied on the Collier’s valuation when it purchased the loan and the security over the property from Credit Suisse and so it had suffered loss. At first instance Mr Justice Blair concluded that the Colliers’ valuation was negligent and that Titan was entitled to bring the claim. Colliers appealed both the finding of negligence and that Titan was entitled to damages in respect of that negligence.
Court of Appeal
On the issue of breach the first instance judgment revealed fundamental flaws. The judge had concluded that the correct valuation in 2005 was €103 million and had made the crucial finding that a valuation below €100 million would not have carried any credibility in the market. On appeal it was agreed there was an inherent inconsistency between that position and the judge also deciding the bracket of a non-negligent valuation was -/+ 15%. Further, the appeal judges agreed with Colliers that its valuation was in line with all the available evidence of the contemporaneous transactions and valuations of the property, particularly in a rising market. On appeal the finding was that €118 million was a more realistic valuation. As Colliers’ valuation came within 15% of that, it won the battle on breach.
The issue of whether the claimant had title to sue was heavily contested. Colliers’ argued firstly that the note holders had a claim against it and it could not have been intended that Titan should have a claim as well. Secondly, even if Titan had a theoretical right to sue, it had suffered no loss because it had laid off the risk of Colliers’ negligence to the note holders who had no recourse to Titan because of the limited recourse provisions of the Titan notes.
The court addressed these arguments even though Titan had failed on breach. Titan could make the claim as part of the securitisation deal as Titan owned both the loans and the securities. The appeal judges disagreed that Titan had suffered no loss, as it suffered a loss when it acquired the loans and securities on the basis of an overvaluation of the Nuremberg property, and so paid too much for the loans.
Clarification of the law
The issue of who has title to sue in the context of losses arising from CMBS products has been significantly clarified. However, the findings were based on the particular contractual arrangements between Titan as the issuer and the note holders. The judge at first instance particularly noted that Titan was contractually bound to distribute the damages it received to the note holders. Not all schemes may be on the same terms.
For those involved in defending valuers in claims of over valuation, this case underlines the importance of collating the details of the sale prices and previous valuations of the property. It’s all too easy to view valuations through the prism of the depressed market in or around 2008. The contemporaneous evidence is often the most cogent and it vindicated Colliers’ valuation.
More generally, valuers and their insurers will need to recognise that claims involving CMBS products may now be made, that previously might have been considered too fraught with complexity to pursue. However a large proportion of the valuations on which claims could be based are going to be over six years ago. A potential claimant could find that whilst they now have a clear route to a claim, it’s blocked by a limitation defence unless the claimant can rely on the latent damage provisions, giving a claimant three years from when it acquired the requisite knowledge to bring a claim. Whilst who has the right to sue has been clarified there still remains the limitation battleground to overcome.