Germany: Liability Of A Bank That Finances A Property Fund For Deliberate Unethical Damage To Investors By Fund Managers

Last Updated: 3 April 2014
Article by Anja Giesen, LLM

Keywords: real estate fund, shareholder, loan, counterclaim

BGH (German Federal Court of Justice), ruling dated December 3, 2013 – XI ZR 295/12

In recent years, the Federal Court of Justice (BGH) has repeatedly dealt with various issues related to the liability of banks that finance property funds. The case decided in December 2013 concerned, in particular, the question of the involvement of a financing bank in deliberate unethical prejudice, under Section 826 BGB (German Civil Code), to investors in the fund by a founding shareholder (BGH, judgment of December 3, 2013, case reference XI ZR 295/12), which was denied in this particular case.


A bank brought claims against the investors as shareholders in a closed real estate fund in the form of a company incorporated under civil law, for the proportional repayment of a loan to the fund. The loan, which was taken out by the fund before the investors joined the fund, served to finance the purchase of property. Due to a fund deficit which had arisen, the bank had terminated the loan for cause. The fund prospectus did not disclose an interim profit, which had been achieved when the fund acquired the fund's real estate from a company whose shareholders were also the fund's managers, for a price around 28% higher than the latter had paid to a third party only three days previously. It subsequently transpired that the fund initiators had adopted this approach in several cases and systematically deceived investors.

Content and subject of the decision

The BGH largely upheld the decision of the Zweibruecken OLG (Higher Regional Court, Zweibruecken), (decision of January 27, 2011 – 7 U 20/11). Initially, the bank was granted a claim against the shareholders as being jointly and severally liable for the proportional repayment of the outstanding indebtedness under the loan, pursuant to Sections 128 and 130 HGB (German Commercial Code), by analogy with the principles of flawed accession by shareholders. To be examined next were any counterclaims by investors submitted in course of the proceedings. In the absence of any direct contractual relationship, the BGH denied a claim by the bank for damages for breach of duty to inform. The substance of the decision lies in the discussion of the question of involvement in unethical damage and hence a counterclaim under Sections 826 and 830 Para. 1 Sentence 1 and Para. 2 BGB. The concealment of the interim profit in the fund's prospectus was classed as an erroneous statement and thus as unethical prejudice by the fund managers to investors. One might also regard the granting of real estate financing by the bank as objective assistance, but it was said that the bank lacked the subjective element of intent to do harm. Although it had known the acquisition and disposal prices, so that it must have noticed the discrepancy in the amounts, the bank could not be accused of knowledge of systematic behaviour on the part of the managers nor of concealing the interim profit in the prospectus as it was unaware of the prospectus. Thus the bank was not liable for involvement in the unethical prejudice to the investors.

At first glance, the decision seems to contradict a 2009 decision of the BHG (BGH, decision of September 29, 2009 – XI ZR 179/07) in which the Senate concluded that a financing bank was at least involved in unethical prejudice to investors. In principle, the case was similar in nature: shareholders in a real estate company incorporated under civil law (investors), the fund manager and the financing bank were arguing over reciprocal claims. In a fund prospectus, investors were led to believe that a subsidiary liability existed, which had not in fact been agreed with the bank. The court found that this constituted a misrepresentation which was crucial to the investors' decision to participate in the fund, which in principle led to the manager's obligation to pay compensation due to deliberate unethical prejudice in which the bank had participated. The key difference compared with the decision of 2013 is that because, in the latter case, the financing bank knew of the representation in the fund prospectus – and this representation contradicted its own loan agreements and it had expressly pointed this out to the manager – the bank could not agree a subsidiary liability provision to repay the real estate finance loans as represented in the fund prospectus with respect to the personal liability of the investors (shareholders in the fund). The bank had, therefore, systematically and knowingly participated in the deception of investors in that, aware of the manager's intended actions, it had gone ahead with funding the real estate, and thereby allowed and intended the deception. The bank's actions were also not justified by its pursuit of its own legitimate interests. Admittedly, the bank was permitted to insist on a direct personal liability but it could not thereby participate in a deception of investors.

This means that the bank should either have refused the real estate financing or insisted on an amendment of the fund's prospectus. However, the extent to which the bank is affected by a supervisory duty remains open. In light of the recent decision, the bank is not liable as long as it did not know of the fund's prospectus or was unaware of a misrepresentation as to the extent of the liability of the investors in the fund. However, where it becomes aware of a statement in the fund prospectus that contradicts its own contractual documentation, it shall, in light of the 2009 decision by the BGH, in its own interest, have an increased duty to insist on a corresponding correction of the prospectus, as otherwise, it shall, where relevant, be liable for corresponding damage or may be subject to such a counterclaim as may oppose its own claim to repayment of the loan. It may seem strange that in a comparison of the decisions a bank which conscientiously keeps itself informed and discusses its customer's fund prospectus bears a higher risk of liability than a bank which finances a property fund without carrying out any more in-depth examination. This is due to the fact that a subjective element is always an intrinsic part of unethical damage, i.e., the knowledge of and intent in relation to – or at least an acceptance of – damage to the investor.

Impact on day-to-day practice

If a bank does not finance the investors' investment, then the bank has no obligation to inform investors, because there is no contractual relationship with the investors. According to the BGH, even in a loanAgreement with the fund, no duty to inform investors is incurred.

When examining a fund prospectus, if a bank notices misinformation that is likely to influence investors in their decision, it should, in order to avoid liability for involvement in deliberate unethical prejudice, go ahead with the financing only upon presentation of a corrected prospectus (for example, by agreeing a corresponding condition precedent to drawdown).

The case law concerning the liability of a bank financing a property fund for deliberate unethical prejudice to investors shows that it often depends on the individual situation and should in general be treated with caution.

Originally published March 27, 2014

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2014. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions