In ruling no. 221 of September 6, 2022, the Court of Accounts declared the lack of jurisdiction over the banks involved in a case of treasury liability exercised by the Regional Public Prosecutor's Office of the Lombardy Region. The case relates to four derivative contracts (interest rate swap) entered into as part of a debt restructuring by Deutsche Bank and Dexia Crediop with the Province of Brescia between 2006 and 2007, allegedly deemed uneconomic, unprofitable and inefficient since they were not adequate to hedge risks.
According to the prosecution case, based on the scenarios expected at inception, the swap contracts were highly uneconomic and characterized by an initial imbalance that was unfavorable to the Province given the negative initial value (so-called mark to market) that was not rebalanced by the banks' payment of an upfront sum to the Province. This would have also generated the contracts' nullity due to a flaw in the contractual cause.
This initial lack of economic convenience and the contractual imbalance allegedly caused an increasing negative exposure of the Province due to the negative payments made by the Province to Deutsche Bank and Dexia, which in the proceedings in question were summoned to repay € 17,939,846.99 and € 17,862,226.68, respectively, corresponding to the negative cash flows paid by the local entity under the derivative contracts. In the alternative, the Prosecutor sought compensation for the implicit costs present at the time the contracts were entered into, respectively, € 1,746,840.06 and € 1,748,831.91.
Moreover, in 2016, the Province of Brescia brought an action for damages against the Banks before the Court of Rome and an action for the annulment of the contracts before the Court of Brescia. However, given the priority of the actions brought by the banks before the High Court of Justice in London to ascertain and declare the validity of the derivatives contracts, and also considering that the jurisdiction of the Italian Courts was challenged by the banks before the Court of Cassation, the dispute moved to the English Courts.
In 2017, after an analysis of British case law on derivatives and in order to contain the significant litigation costs, the Province entered into a settlement agreement with the banks, which involved the dismissal of the pending civil proceedings in Italy and England, waiving further compensatory claims. The Province acknowledged the validity and effectiveness of the derivative contracts and received a payment of a contribution of € 1,050,000 made by Deutsche Bank. Despite the settlement agreement, in its ruling, the Court pointed out that new proceedings are currently pending before Italian and English Courts.
On the basis of the principles already stated by the case law that has dealt with similar cases (in particular, the case concerning Morgan Stanley for derivative contracts entered into with the MEF, Cass. SS. UU. no. 2157/2021, and a more recent case concerning derivative contracts entered into by the Basilicata Region, Court of Accounts no. 2/2022), the Court of Accounts concluded that in the case at hand the jurisdiction of the accounting judge is lacking for several reasons.
The Court pointed out that the role of advisor taken on by the banks is private in nature and, by itself, does not prove the establishment of the service relationship which is the necessary prerequisite for the purpose of bringing an action of treasury liability against entities which are not part of the Public Administration.
In this case, the Prosecutor has not provided suitable evidence to show that, in actual terms, the banks would have inserted themselves into the organizational structure of the public entity thereby replacing the Province or, at least, that the banks would have decisively oriented the administrative choices concerning the restructuring and management of debt through the signing of the swap contracts.
Indeed:
– the banks' proposals for active management of the Province's debt and the expression of interest in the role of advisor do not constitute evidence of the service relationship, but were contractual offers that the public entity was free to accept or not by fully exercising its discretionary powers;
– even the email correspondence between one of the banks and the competent provincial official, although revealing in the case at hand the participation of such bank in the drafting of the executive resolution and the resolutions of the Province's Council and Executive Board in relation to the transactions, are considered by the Court to be “texts of technical content, in whose drafting the advisor who will carry out the activity in question generally also participates”, texts that in any case were the result of a confrontation and discussions between public and private parties, and therefore not suitable as evidence of the service relationship between banks and the administration;
– neither does the circumstance that the Province entered into the swaps only after receiving the banks' proposals demonstrates the insertion of the banks into the Province's administrative organization since the decision to enter into the derivative contracts is an independent expression of the Province's will to insure itself against interest rate fluctuations, judging the strategy proposed by the advisors to be effective;
– the presence of the contractual clauses contained in the advisory mandate and the swap contracts in which the Province stated that it made its decisions independently and evaluated at its sole discretion the appropriateness for its own purposes of the contracts, are not merely formal in nature, as the Prosecutor argued. “In fact, the clear wording, their conscious signing and the consideration that their content found subsequent confirmation in the statements made by the Province in the 2017 settlement agreement oust the thesis of being in the presence of mere standard clauses, having instead – in the absence of proof to the contrary – also a substantial value.“;
– the Prosecutor also failed to provide any evidence that the Province lacked competence and expertise in the matter and that the declaration of qualified operator issued by the Province to the banks, pursuant to Article 31 of Consob Regulation No. 11522/1998 in force at the time, was untrue or erroneous. In the case at hand, there was no investigative activity to ascertain that the Province did not have specific skills and experience (for example, the Prosecutor's Office did not acquire the register of the staff in service, nor did it verify whether, what and how many financial transactions had been carried out by the Province in the past). “Moreover, if it were sufficient to infer the proof of the lack of adequate professionalism in the financial field only from the fact that the Entity turned to advisors, then every time a Public Administration resorts to an advisor it should be assumed that the advisor is automatically inserted in its organization: which, of course, is not true!“.
In the case at hand, therefore, the Court of Accounts ruled out that a service relationship had been established between the Province and the banks, while it should be more correctly configured as a contractual relationship of a private nature, the possible violations of which give rise to forms of civil liability that fall within the competence of civil Courts. Consequently, the Court of Accounts of the Lombardy Region declared that the accounting judge lacked jurisdiction over the banks.
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