A securitisation issuer was able to sue a valuer for negligent valuation of property forming part of the securitised assets.
A special purpose vehicle (SPV) issuer of notes in a commercial mortgage backed securitisation (CMBS) claimed that a property valuer gave a negligent valuation. The property was part of the portfolio of assets that were transferred to the SPV as part of the securitisation. The valuer claimed that the SPV had suffered no loss, because the claims of noteholders against it were reduced by the extent of any shortfall in the value of the property. Any loss had been suffered by the noteholders and it was they or the note trustee who should bring the action.
The Court of Appeal held that the valuation was not outside the margin of error of 15% so that the claim of negligence did not succeed.
Although it was thus not strictly relevant, the Court of Appeal went on to consider the question of who was the correct claimant, as it was important to the securitisation industry and had been fully argued. The court held that the SPV was legal and beneficial owner of the property, even if it had transferred the commercial risk in the property, and so it had the title to sue. It was not relevant that any recovery might be passed straight on to noteholders in accordance with the securitisation documentation.
The court also accepted the argument that the entry of the SPV into the securitisation did not reduce the damage caused by the negligent valuation. It was an act that occurred after the loss had been suffered and it was not a consequence of the negligent valuation. Therefore, it was not to be taken into account in determining the SPV’s loss.
The case was analogous to a company and its shareholders – just because shareholders might be the ultimate losers, this did not deprive a company of the right to sue in respect of its property.
The Court of Appeal took an admirably straightforward approach to the situation: a negligent valuation caused loss to the SPV when it acquired property that was worth less than expected. What happened afterwards – including an alienation of the risk in the property by the SPV – was not relevant.
This locates the title to sue in respect of securitised assets with the SPV. This is usually the right place. What this judgment sacrifices, in order to preserve simplicity, is the option to modify this conclusion if the securitisation documents require it. It follows that those drafting securitisation transactions should take account of receivables that accrue to the SPV as a result of litigation in respect of its assets.