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.

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