UK: Syndicated Lenders - Navigating the Legal Black Hole

Last Updated: 16 September 2010
Article by Fergal Cathie and James Carter

It is common knowledge that in the financial boom times lenders were granting large numbers of mortgages, only to straight away package them up and sell the loans on. The question is what this means for the claims now arising against professionals involved in those transactions. 

A mortgage lender may not suffer much loss when there is default on a loan if part of the loan has already been sold on to other lenders. But, if the loan was made on negligent advice, can the lender still bring a claim for loss which has, in reality, been suffered by the purchaser of the loan?

That was the question in Helmsley Acceptances Ltd v Lambert Smith Hampton Group Ltd (2010) in which a lender successfully appealed an order granting summary judgment to a valuer where the majority of the loan had been syndicated to other lenders. While complex financial transactions involving the syndication or securitisation of loans has become common, this decision leaves the legal consequences for claims against professionals in an uncertain state.

Background

The general rule is that only a party to a contract can sue under it, and a contracting party may not normally sue on behalf of a non-party even if it is the non-party rather than the contracting party which has suffered loss. Similarly in the tort of negligence, a claimant who has suffered loss, but who was not owed a duty of care, would ordinarily be unable to bring a claim. As a result, if a lender sells all or part of the loan on and the borrower defaults, it may be said that the lender has not suffered any significant loss and, for that reason, may not be entitled to bring a claim to recover that loss.

Facts in Helmsley

In 2007, Helmsley ("H") agreed to provide Red Lion 80 Limited ("Red Lion") with a loan to enable them to purchase a property. Before agreeing to advance the monies, H instructed Lambert Smith Hampton ("LSH") to value the property which would be security for the loan. In their instructions to LSH, H made it clear that "[H] is in the business of granting mortgages, but it also sells these mortgages to other parties. These parties assess the viability of such purposes on a number of factors, one of which is the valuation".

LSH valued the property at between £2.25 million and £2.5 million, in reliance upon which H advanced a loan of £1.25 million to Red Lion. Prior to the drawdown of the loan, H syndicated the loan to a number of investors, the effect of which was that H had only actually lent £10,000 of the £1.25 million loan.

Red Lion subsequently defaulted on the loan, and the property was sold for £264,000, leaving a significant shortfall to H and the other syndicated lenders. H then brought a claim for the entire loss against LSH, alleging negligent over-valuation. In the course of proceedings, H also denied claims that it had any liabilities to the syndicated lenders.

The Decision

At first instance, on application from LSH, HHJ Langan granted summary judgment against H, essentially on the basis that H had suffered no loss beyond the £10,000 which it had loaned.

The Court of Appeal, in overturning that decision, held that H's case was at least arguable because:

  1. H had argued that it was a trustee of the loan and, by implication, a trustee of the rights associated with the loan. Accordingly, when H became mortgagees of a property worth just £250,000, they acquired a defective asset and suffered loss. That the loan was syndicated from the outset and was held on trust did not bar H from claiming the full loss as a trustee, even though the loss was ultimately suffered by the other lenders as beneficiaries of the trust.
  2. H had argued that the so-called "Albazero exception" (see below) applied where it is in the contemplation of the contracting parties at the time of entering into the contract that the owner of property may transfer all or part of his proprietary interest after the contract has been entered into. In those circumstances the original owner can recover loss suffered by all of those with a proprietary interest.

Analysis

Although claimants' solicitors will no doubt interpret this case as evidence of the courts' willingness to award damages beyond the loss in fact suffered, defendants should not be daunted by it: it is a decision which should be confined to its own facts. 

The appeal was of an order for summary judgment, and as a result the highest it can be put is that the arguments considered by Longmore LJ have a real (meaning more than fanciful) prospect of being successfully argued at trial.

This was a merits based judgment motivated in large part by the peculiar facts of the case. The valuation appears to have been wrong by a factor of between eight and 10. Longmore LJ was concerned that, if H could not advance a claim for the full loss, LSH would avoid liability. This was because it had yet to be resolved whether the other syndicated lenders were owed a duty of care by LSH. In these circumstances, the legal theory that the law (and in particular the law of tort) should allocate loss to the culpable party, apparently motivated the Court of Appeal to find a way to stop the claim disappearing down a "black hole".

However, whilst these considerations prevailed at the summary judgment stage in that case, it is far from certain that the arguments have more general application.

The trustee argument is a device which should only apply where there is a loss which should be recoverable but which cannot be recovered by the party who suffers the loss due to the lack of a cause of action. This was not necessarily the case in Helmsley where it remained to be established whether the syndicated members had a cause of action in tort or contract. Even if they had no cause of action, that may be because the valuers had limited liability and it might not be possible for the syndicated members to circumvent that.

Similarly, the 'Albazero exception' to the general rule was developed in the complex contractual framework of shipping contracts, and in particular bills of lading. Although it can be of broader application, it should not be applied in circumstances such as these where either the claim will not fall into a black hole if the syndicated members have their own cause of action, or the professionals have validly excluded liability to other lenders.

In any event, an unusual feature of this case is that the lender told the valuer, at the time of entering into the contract with the valuer, that the loan or part of it may be sold, yet (though this was disputed) the valuer owed no duties to those who bought the loan. This was the key fact in this case and is the main basis upon which it might be distinguished.

Conclusion

The Court of Appeal considered the claimants to have an arguable case that they were entitled to recover the entire loss, and that that case ought to be fully argued and resolved at trial. This case, despite the way claimants will seek to interpret it, is authority for no more than that. 

Even so, the concern for professionals who face these types of claim is that the Court's enthusiasm to do justice, on the extreme facts of this case where the error made was so dramatic, may cause usual principles to be overlooked at trial. This could create a dangerous precedent and it is for that reason that the outcome of the trial is eagerly awaited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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