Resolved Bank Found Liable As Pledgee Of Third-party Owned Shares In The Bank

The fiduciary nature of the managed investment relationship supports the view that the bank should be liable for the loss of the pledged item because there would not have been such loss had the client’s order been executed prior to the bank’s resolution — but not for the reason given in the judgment.

1. The case

Pursuant to Article 1867 CC (“CC”), a pledgee must exercise, as such, the care of a reasonably prudent person, is entitled to reimbursement for expenses incurred in the upkeep of the pledged item and is liable for any loss or damage thereof in accordance with the provisions of said code.

On 22 December 2016, Delta submitted an out-of-court claim to Banco Popular for failing to execute the order to sell the bank’s shares that were in its custody. Ultimately, the shares were written off as a result of the intervention by the European supervisory body (the Single Resolution Board, SRB) and their subsequent sale to Banco Santander for one euro. Based on these facts, Delta sought, in the main, a declaration of breach of contract by Banco Popular in its portfolio management, order execution and banking advice by failing to execute the order to sell the bank’s shares. In the alternative, Delta sought a declaration that Banco Popular was liable, in accordance with Article 1867 CC, for the loss of the shares pledged as loan collateral.

2. The Supreme Court judgment (no. 1207/2026 of 20 July, ECLI:ES:TS:2026: 3188)

The Court of Justice’s judgment of 5 May 2022 (Case C-410/20), in reference for a preliminary ruling concerning the effects of the decision to place Banco Popular under resolution with respect to shares previously acquired in a public offering, held that Directive 2014/59 precludes, following a total write-down of shares in the capital stock of a credit institution or investment firm subject to a resolution procedure, persons having acquired shares, in the context of a public offer to subscribe issued by that institution or firm, before the opening of such a resolution procedure, from bringing an action for damages on the basis of the information provided in the prospectus or an action for a declaration of invalidity of the share subscription agreement, which, given its retroactive effect, results in the restitution of the value of said shares.

Shareholders bear the “first loss”.

However, the previous case law of the Court of Justice of the European Union does not apply to a case such as this one — specifically, to the action brought under Article 1867 CC for the loss of the pledged shares — because this action would not be affected by the previous ruling, insofar as it is neither an action for a declaration of invalidity of the acquisition of the preferred stock (later converted into bonds and subsequently into shares) nor an action for damages arising from that acquisition, when the shares in the capital stock of a credit institution subject to a resolution procedure are subsequently fully written down. In this case, the action brought under Article 1867 CC, which governs a pledgee’s liability, is based on the fact that the bank failed to comply with an order to sell the shares pledged as collateral for a loan at a time (May 2015) when the share price would have allowed the loan to be repaid and would even have left a surplus for the client. However, the decline in the share price and the subsequent writedown resulted in the loss of the pledged item, which the claimant attributes to the bank’s conduct.

The claimant has standing to bring the action provided for in Article 1867 CC for the loss of value of the pledged shares because the bank failed to carry out the sell order; this action cannot be based on the facts or conduct that led to the bank’s resolution, in accordance with the case law already cited. On this basis, Delta has standing to bring the action. Specifically, the claim attributed the loss of the pledged shares to the bank’s failure to comply with the order to sell the shares — which were subsequently lost — as the bank pursued its own interests due to its “urgent need for capitalization”. There is no violation of Articles 37(2)(b) or 39(2) of the Credit Institutions and Investment Firms (Recovery and Resolution) Act 11/2015 of 18 June — the violation of which is the first ground of appeal — because these provisions are not applicable to the action brought, which is not subject to the general rule that no obligation shall subsist with respect to the amount of the instrument that has been written-down. This is a different type of action from those cases in which the Supreme Court, in accordance with the case law of the Court of Justice of the European Union, has found that no action exists.

The second ground of appeal alleges a violation of Article 1867 CC due to conflicting case law among the provincial courts, insofar as they have divergent views on the liability of the pledgee in the event of the loss of a pledge consisting of securities1. The bank contends that Article 1867 CC does not extend to the bank’s liability “for the loss of the shares as a result of the resolution of the bank that issued the pledged shares, decided by the Single Resolution Board on 7 June 2017”. This ground is rejected for the following reasons:

• In the present case, where the pledged asset consists of shares in a financial institution, in addition to the provisions of Articles 1863 through 1872 CC, the specific provisions of the Financial System (Reform Measures) Act 44/2002 of 22 November and of Royal Decree-law 5/2005, of 11 March, on urgent reforms to boost productivity and improve public procurement, will apply.
• The pledge established on the bank’s own shares constituted financial collateral in accordance with Articles 6 and 7 of Royal Decree-law 5/2005. Article 1866 CC provides that “a pledge agreement entitles the pledgee to retain the property in his possession or in the possession of a third party to whom it has been delivered”. And Article 1871 of the same code denies the pledgor the right to “demand the return of the pledged property against the pledgee’s will until the debt and interest are paid, along with any applicable expenses”.
• Article 1867 CC, upon which the action under review is based and which the appellant claims has been violated, imposes on the pledgee the duty to “exercise, as such, the care of a reasonably prudent person, is entitled to reimbursement for expenses incurred in the upkeep of the pledged item and is liable for any loss or damage thereof in accordance with the provisions of said code”, in accordance with the provisions of the Civil Code.
• In a case such as this one, in which the pledged property consists of shares in a financial institution — subject to special regulations — in order to determine the bank’s liability for the loss of the pledged shares pursuant to Article 1867 CC, it is necessary to analyse, first, whether the bank’s failure to comply with a sell order given by the shareholder constitutes a breach of the duty of due care and preservation when the shares subsequently lose their value and are written off.
• The Supreme Court had already ruled on a similar case involving a pledge of a securities deposit in Judgment no. 444/2014 of 3 September. In that ruling, it was held that the pledge constituted financial collateral governed by Royal Decree-law 5/2005, which required the express authorisation of the pledgee (the bank) in order to be substituted. The conduct examined in this judgment consisted of partially disregarding the order to sell one of the acquired financial products and the order to purchase others in accordance with the financial institution’s own interests. That is, whether it was justified for the financial institution to refuse to comply with the sell and buy orders because that financial product was pledged.
• The Supreme Court held that, in reality, the issue was whether the failure to comply with the sell and buy orders — taking into account in that case that the deposit was pledged to secure two credit transactions — constituted a breach of the duties imposed on the defendant by Article 79 of the Securities Market Act 24/1988 of 28 July — applicable ratione temporis, in the version prior to the amendment by Act 47/2007 of 19 December —. This provision set out the principles and requirements to be observed by investment firms, credit institutions, and individuals or entities operating in the securities market, both when receiving and executing orders and when providing investment advice on securities, including the obligation to minimise conflicts of interest and, in the event of a conflict, to give priority to the interests of their clients. In the present case, Articles 79 and 79 bis of Act 24/1988, as amended by Act 47/2007, were applicable; this law transposed Directive 2004/39/EC (the European financial markets regulation, known as MiFID) into Spanish law. These provisions governed disclosure obligations and conflicts of interest.
• Although Judgment no. 444/2014 alleged a violation of Articles 1866 and 1871 CC — which apply generally to all pledge rights, without prejudice to the specificities of special regimes and contractual agreements — its reasoning, set out below, is also applicable when a violation of Article 1867 CC is alleged, although there is a significant difference between this case and that one, which will lead to a different outcome:
  • Article 9 of Royal Decree-law 5/2005, of 11 March, concerning the rights to substitute and dispose of the subject matter of pledges, provides in paragraph 1 that, “[w]hen the financial collateral agreement so provides and under the terms it establishes, the guarantor may exercise, no later than the date of fulfilment of the principal financial obligations covered by the collateral agreement, a right to substitute the collateral, consisting of the ability to make use of the subject matter of said financial collateral, in exchange for the simultaneous provision of an item that has substantially the same value to replace the original one”.
  • Pursuant to paragraph 2, when the pledge agreement so provides, the pledgee may exercise a right of disposition over the subject matter of the pledge, consisting of the ability to use and dispose of the subject matter as its owner.
  • In Judgment no. 44/2014, the Supreme Court held, in accordance with the terms of the agreement, that it fell within the defendant’s discretion to either approve the order to sell and purchase the pledged shares in order to replace the collateral with the proceeds obtained, or to deny authorisation to sell, since the secured obligation remained outstanding. Similarly, it could refuse to substitute the collateral. That is to say, the refusal to comply with that order to sell and purchase constituted the exercise of its own right as pledgee, and such exercise could not be deemed — as the appellate court did — to be contrary to the requirements imposed on it, in its capacity as a fund manager, by Article 79 of the Securities Market Act then in force. It further noted that, in this context, the right of retention over the collateral was supplemented by the provisions of the aforementioned Article 9 of Royal Decree-law 5/2005 and by the terms agreed upon in the pledge agreement.
  • In this case, the tenth provision of the addendum to the securities pledge agreement stipulated that the bank’s consent was required to release the securities from the pledge. Therefore, in this case as well, the pledgee, in accordance with the agreement and the provisions of Article 9 of Royal Decree-law 5/2005, had the authority to decide whether to sell the shares or replace the collateral.
  • However — the Court continues — the present case differs from that in Judgment no. 444/2014 because the sale order entailed the repayment of the loan and the termination of the pledge due to the extinguishment of the secured claim, since the value of the shares exceeded the secured capital. Whereas, in the case decided in that judgment, the sale entailed only a partial repayment of the secured loan, and the intention was to replace the subject matter of the pledge with other securities, which justified the financial institution’s refusal,in a case such as this, where the market price of the shares made it possible to repay the loan through their sale, the bank’s exercise of its right to retain the pledge and refuse consent to cancel the pledge — by not proceeding with the sale — and thereby the loan, entails a redistribution of the risk of insufficient collateral coverage, which is transferred to the pledgee. Thus, it is the bank that assumes the risk of a loss in the value of the pledged shares due to a subsequent devaluation and their subsequent write-down, as occurred in this case.

The right to early repayment does not imply the right to realize the value of a pledge to obtain liquid funds to pay off the loan

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