UK: CASE UPDATE: RBS v Highland Partners LP & Ors

[2013] EWCA Civ 238

Successful appeal against bank which obtained judgments by fraud and dishonesty

On 12 April 2013, the Court of Appeal held that judgments obtained previously by RBS in the Commercial Court against Highland had been obtained by fraud and, due to the dishonesty exhibited by RBS, refused to allow anti-suit injunctions sought by the bank in relation to proceedings brought by Highland and Scott Law in Texas.

Factual Background

Between 2006 and 2008, RBS, like many other banks, was heavily involved in funding structures based on financial derivative products such as CDOs (Collateralised Debt Obligations). As was common practice, the Texas-based Highland group of companies launched a CDO issued by an SPV. RBS was to be the "Advisor" to the transaction and would finance the purchase of the portfolio, in this case consisting mainly of European Senior Secured Loans, to be held by the SPV issuer. The loan portfolio would provide security for the Notes that were issued by the SPV issuer under the CDO and the sale of the Notes would eventually reimburse RBS for the initial portfolio financing. In 2009, RBS bought a claim for money it said it was owed following the termination of this CDO transaction. Upon what RBS claimed was the realisation of the collateral under the CDO transaction documentation, RBS issued proceedings against Highland for the shortfall it was owed. RBS obtained summary judgment on liability for the claim in February 2010, which was then affirmed by the Court of Appeal in July 2010.

A further judgment in respect of quantum was obtained by RBS in December 2010. However, during these proceedings, it came to light that RBS' claim was not based on genuine sums received from the sale of the collateral. Under the CDO transaction documentation, RBS was obliged to auction off the collateral in order to recover sums it was due. However, on 13 October 2008, an amendment to International Accounting Standard 39 came into effect which permitted the banks to transfer, on a one off basis, certain assets on their trading book to their banking book before 31 October 2008. In order to take advantage of this amendment, RBS decided it would buy 36 of the portfolio loans and transferred these loans from its trading book to its banking book on 31 October 2008 prior to the auction sale taking place. RBS then conducted what Burton J called a "sham auction" to determine what credit to give to Highland for the 36 loans.

Following the discovery of this information, Highland brought proceedings in Texas against RBS and two individual RBS employees involved in the handling of the transaction for fraud. RBS then sought an anti-suit injunction in England arguing that Highland has misapplied the jurisdiction clauses in the CDO documentation and that only the English courts had jurisdiction. RBS further argued that Highland should not be permitted to pursue litigation in Texas in relation to matters already decided by the English Courts. Highland brought a counterclaim alleging that the liability and quantum judgments of 2010 had been procured by RBS' fraud and should therefore be set aside.

What was decided by the English courts

Burton J's Judgment- May 2012

At first instance, Burton J decided that RBS' misconduct, the fact that it had come to the proceedings with "unclean hands" and the fact that there had "not been any relevant washing of hands" meant that there was no reason to grant the injunction enforcing the exclusive jurisdiction clause in favour of RBS.

With regard to Highland's claim that the liability and quantum judgments should be set aside, Burton J noted that RBS had concealed from Highland the fact that the 36 loans had been transferred to RBS' banking book at 30 June prices and a "profit" had been obtained by 31 October due to the subsequent fall in value of the loans. Additionally the 36 loans were therefore not for sale to third parties. Burton J found that this concealment of information was not fraud. In his view, while RBS has suppressed information, it had not made positive false statements and, there was no proof that failure to disclose the suppressed facts was "deliberate and dishonest". Further, in any event, Burton J concluded that the suppressed facts would neither have resulted in the dismissal of the claim for summary judgment in the liability claim nor would they have affected the judgment in respect of quantum which was decided on honest evidence.
Thus, Burton J refused to grant RBS anti-suit injunctions to prevent the Texas proceedings. He also refused Highland's request to dismiss his earlier liability judgment.

Court of Appeal- November 2012

RBS and Highland appealed this decision of Burton J. The appeal was heard by Lord Justices Kay, Toulson and Aikens in the Court of Appeal.

Lord Justice Aikens, giving the primary judgment, found that the first issue to be decided was whether the liability judgment could be set aside for fraud as this would be a major factor in deciding whether the anti-suit injunction should be granted.

It was considered that the principal issues in relation to the liability judgment issue to address were:
1) whether the suppressed facts were correctly characterised as a fraudulent concealment or whether it was actually a fraudulent misstatement;
2) whether RBS' failure to disclosure the suppressed facts was dishonest;
3) whether Burton J was correct in concluding that, even if there had been dishonesty, there was no causative link between these dishonest actions and the liability judgment in favour of RBS; and
4) whether, if the liability judgment were retried, the same result would follow in respect of liability and quantum.

In respect of the first point, Aikens LJ found that there was more than "simple concealment" (paragraph 122) of the suppressed facts and that the RBS employee involved (Sam Griffiths) was positively misleading both Highland and the court at the time of the liability hearing. Aikens LJ further found, in respect of the second issue, that Mr Griffiths had permitted the "misrepresented position to be understood as the true position" (paragraph 127) which was dishonest and additionally Mr Griffiths had not addressed the quantum related issues at the liability hearing on purpose so as not to "muddy the waters" (paragraph 66). With regard to the causation issue, the judge noted that he would have agreed with Burton J that the defences Highland had relied upon would not have succeeded in defeating the summary judgment application if the suppressed facts were known. However, more important was the fact that if the suppressed facts had been revealed, then RBS would not have applied for summary judgment based on liability at all therefore causation was not a relevant factor. Finally, Aikens LJ concluded that as RBS' misconduct in relation to the 36 loans and the sham auction would have entirely changed the basis of RBS' summary judgment application then, logically, the liability judgment would have to be set aside. Aikens LJ held that the quantum judgment should also be set aside as a necessary consequence.

As regards the equitable relief sought by RBS by way of the anti-suit injunction application, RBS advanced two arguments which were:
1) there was an insufficiently "immediate and necessary" relation between the misconduct of Mr Griffiths and the claim by RBS for the anti-suit injunction; and
2) any misconduct by Mr Griffiths could not be attributed to RBS such that RBS could be said to have "unclean hands".

Aikens LJ concluded firstly that when Mr Griffiths gave evidence at the 2012 trial, he had sufficient status within RBS to make his evidence that of RBS for the purpose of "unclean hands". Secondly, in light of all the facts, Aikens LJ concluded that Burton J was right to hold that the defence of "unclean hands" could be relied upon by Highland and Scotts Law.

Kay LJ added that the case had drawn attention to issues regarding the concealment or non-disclosure of facts, such as where Mr Griffiths did not mention issues regarding quantum in the liability hearing so as not to draw attention to those non-specific but not unrelated matters in the liability hearing. This concealment led to the finding of fraud in the Court of Appeal. Kay LJ noted in his judgment that in the future cases, there will be more tailor-made disclosure directions providing for disclosure on an issue by issue basis. In his view, the Civil Procedure (Amendment) Rules 2013 at rule 31.5(7)(c) highlight this issue and, if used properly, should reduce disclosure costs. Caution however is advised by Kay LJ in respect of disclosure directions to ensure that one party is not disadvantaged by being ignorant of important material that relates to issue B at a time where only disclosure for issue A is required.

Comment

This is perhaps the first case where a UK bank has had judgment struck down before the English courts on the basis it was obtained by the bank's fraud. This landmark decision comes after years of litigation which commenced as a seemingly standard debt collection exercise for RBS. The case was of particular media interest because RBS is majority owned by the state. Commentators have noted that the decision confirms that RBS bankers are not above the law.

Kay LJ's reference to the new Civil Procedure Rules highlights the tendency toward increasingly active case management by the courts. Kay LJ decided not to give any guidance on how the potential problems he identified could be avoided in future against the background of the new rules. It is vital that parties' lawyers carefully consider the question of disclosure by reference to issues, such as might occur where liability and quantum issues are heard separately. It remains to be seen how litigants and the courts will apply the new rules to future cases.

The full text of the judgment can be found here.

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.

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

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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