Financial services litigation has been busy in 2019! This is a quick summary of six cases which have been decided in England in 2019 so far. Most have some link to the global crisis in financial markets which began in 2008.
Connection to benchmark interest rate manipulation does not allow borrower to escape termination costs
The troubled acquisition of Ciudad Financiera, the Madrid headquarters of Santander, reached a watershed moment. In February, the Commercial Court found the site owner (Marme) liable for about EUR 710m of termination costs, arising from interest rate hedging on its acquisition loans. The case involved allegations about benchmark interest rate manipulation. The five banks who provided the hedging successfully defended Marme's claim to tear the transactions up. Justice Simon Picken found that they had not made implied misrepresentations about benchmark rates inducing Marme to enter into the hedges. He also found that an interest rates trader at one of the banks (which was not at the time a BBA LIBOR panel bank) had engaged in sharing of price-sensitive information with rates traders at other banks. Ultimately, though, this was not enough for Marme to escape liability. The details of the case have been widely reported elsewhere.
Bank was not a trustee
In another victory for bank against customer, the Court of Appeal overturned a judgment in favour of the customer, Zumax, for about $3.5m against First City Monument Bank. Zumax alleged that First City was trustee of payments made to First City's account that it held at a correspondent bank in London. Zumax had directed First City to transfer the money on to Zumax's account in Nigeria. Zumax did not in fact receive the money (First City may have misappropriated it).
Zumax preferred a claim against FMB based on trusteeship over claims based on contract or fraud, presumably because the trust claim has a longer limitation period. The Court of Appeal held that the relationship was the ordinary one of banker-customer, not trustee-beneficiary. Lord Justice Guy Newey said that if Zumax's trust claim were upheld, it "could confuse and complicate the operation of correspondent accounts. After all, were the transfers in dispute held on trust, would it not follow that payments into correspondent accounts must commonly be subject to trusts?" The Court of Appeal placed importance on the fact that the transfer instructions did not contain any express declaration of trust. Also, that the money was not segregated in First City's London account.
No bad faith in enforcing security
A recent feature of the UK finance disputes landscape has been (typically unsuccessful) claims by commercial borrowers with financial difficulties that their lenders have enforced lending and security documents in bad faith or for some improper reason - commonly to allegedly obtain the benefit of the borrower's secured assets for the commercial lender's own balance sheet. In the case of Elite Property Holdings, the lending bank had given a temporary undertaking (for regulatory reasons) not to enforce its lending and security documents upon an event of default, unless there were "exceptional circumstances". The borrowing companies, under threat of insolvency due to unpaid taxes, transferred their business to a new company without the bank's consent and sought to restructure their debts in a CVA (a statutory arrangement with creditors, which constituted defaults under its lending and security documents). Pursuant to its undertaking, the bank obtained independent regulatory permission to take 'exceptional' enforcement action.
The borrowers sued, alleging that the bank had enforced as part of a conspiracy with a professional firm which the bank appointed as receivers of the borrowers' assets. Judge David Waksman, at first instance, rejected that claim as having no arguable basis or prospect of success. The Court of Appeal upheld that decision. The case is another example of how it can difficult be for claimants to sustain these types of allegations beyond the summary judgment/strike out stage of proceedings. The decision is also a reminder that standards for pleading claims (like conspiracy) founded on dishonest intent or improper purposes.
Lehman administration generated £7bn surplus
The administrators of Lehman Brothers International (Europe) (LBIE) – the London-based, European arm of Lehman Brothers – have returned to the UK Supreme Court for a fourth time, this time in a dispute with UK tax authorities regarding the taxation of interest payable to creditors. LBIE went into administration in September 2008. The Supreme Court's judgment has brought to public attention the fact, extremely unusual in UK restructurings, that LBIE's estate is hugely solvent and that creditors will have earned a handsome rate of interest on their debts. Lord Michael Briggs, giving the judgment of the Supreme Court, remarked that "…the administration…has…generated an unprecedented surplus…, in the region of £7 billion, of which some £5 billion is estimated to be payable by way of statutory interest (before deduction of income tax)." The Supreme Court has ruled that tax is to be levied on the interest payments.
Another dispute over termination costs: Lehman sees off claim from shareholders in SAP
We also note another case involving Lehman Brothers – this time, its Switzerland-based derivatives business. The case turns on its own facts, but the facts are remarkable and worth summarizing briefly. Lehman Brothers Finance AG (LBF) had entered into a series of very large equity derivatives with the private wealth vehicle for the Tschira family – Klaus Tschira having co-founded SAP, a software business headquartered in Germany. The Tschiras held substantial wealth in SAP shares. The derivatives hedged the risk of movements in the share price. The Tschiras granted a pledge over their SAP shares to LBF, to secure payments they were to make under the derivatives.
The transactions terminated early when Lehman Brothers Holdings Inc filed for Chapter 11 bankruptcy protection in the US in September 2008. It fell to Aeris Capital, on behalf of the Tschiras, to calculate the termination payment due on early termination of the derivatives. The pledged SAP shares were caught up in the administration of LBIE (who was custodian of the shares). They were therefore not available to the Tschiras to pledge as collateral for any replacement transactions. Aeris therefore calculated the termination payment "uncollateralized" – i.e. on the basis of the cost/loss to the Tschiras of entering into replacement transactions without the Tschiras pledging their SAP shares. That, Aeris/ the Tschiras contended, amounted to EUR 511 million. The court, however, rejected that argument.
Justice Richard Snowden ruled that under the ISDA documentation governing the transactions between the Tschiras and LBF, LBF had not agreed to accept the risk of the insolvency of the security custodian and the consequent unavailability of the pledged shares for a replacement trade. The judge held that the termination payment had to be calculated on the basis that the shares would be available as collateral for a replacement trade. The correct loss calculation was therefore EUR 23 million (EUR 488 million less than the Aeris/Tschira calculation).
No performance fee for CLO collateral manager
Finally, in another dispute between a financial institution and an institutional investor, Napier Park, a credit-focused hedge fund manager, has successfully argued that the collateral manager of a structured credit product (a CLO called Duchess VI) in which it had invested is not entitled to a 20% performance fee, totalling some EUR 15 million. One of the hurdles to the performance fee was that the aggregate internal rate of return (IRR) on the relevant notes exceed 10% per annum. Over the lifetime of the notes, they had returned only about 8% per annum in interest distributions. Napier Park redeemed early. The manager argued that the capital payments on redemption should be included in the IRR calculation as well, which would have taken the notes over the 10% performance hurdle. The manager argued that the reference in the relevant contractual definition to the fee being payable "…pursuant to the collateral management agreement" (as well as in accordance with the interest payment waterfall clause) was sufficient to require surpluses on early redemption to be included in the income/performance calculation. Giving judgment, Sir Geoffrey Vos rejected this argument, but has gone on to give permission to appeal.