Securitised Loans – The Lay of the Land Post-Freeman

06-06-2014

Author: Gregory Glynn and Peter Bredin



Securitised Loans

In a judgment delivered on 29 May 2014 in Freeman v Bank of Scotland plc and Others, the High Court held that securitisation of loans did not alter the obligations of the borrowers to repay those loans, and that the bank which had loaned the monies was entitled to appoint a receiver notwithstanding the securitisation. Arthur Cox successfully represented the bank and other defendants in the case.

Background

In 2006, the plaintiffs, a married couple, obtained refinancing from Bank of Scotland (Ireland) Ltd (“BOSI”) in the sum of €1.4 million secured by a charge over their portfolio of buy-to-let properties. Of this, approximately €800,000 was used to discharge existing mortgages with another lender, and the balance was released to the plaintiffs.

On 31 December 2010, all of the assets and liabilities of BOSI transferred to Bank of Scotland plc (the “Bank”) under the European Communities (Cross-Border) Merger Regulations 2008.

The plaintiffs defaulted on their repayments, which led to the Bank appointing a receiver over the secured properties in November 2011. In 2012, the plaintiffs issued proceedings challenging this appointment and the Bank responded by bringing an application to dismiss the proceedings on the basis that they were frivolous, vexatious and bound to fail.

In May 2013, the High Court dismissed the majority of the plaintiffs’ claims. The plaintiffs were permitted by the Court to continue their proceedings in respect of the issue of whether the Bank had complied with the Central Bank of Ireland Code of Conduct on the Transfer of Mortgages, and the issue of whether – BOSI having transferred some of the plaintiffs’ loans to a special purpose vehicle by way of securitisation – the Bank was entitled to take enforcement measures. The plaintiffs subsequently raised additional issues regarding the BOSI/Bank merger and certain provisions of the Registration of Title Act 1964, as well as the impact of an overcharging error which had been made and corrected by the Bank.

In a judgment delivered on 29 May last, Mr Justice McGovern dismissed the plaintiffs’ claims against the Bank and other defendants in their entirety.

The Securitisation Issue

Five of the plaintiffs’ six loans had been securitised by BOSI. The plaintiffs had consented to securitisation in their loan applications and also in their loan agreements with BOSI. 

The plaintiffs contended that the Bank was not entitled to enforce any mortgage or charge granted as security for the loans which had been securitised. 

Mr Justice McGovern noted that securitisation involves a transfer of the equitable title to a mortgage only. BOSI retained the legal title. BOSI (and the Bank, post-merger) continued to service the mortgages. The Bank remained at all times in control of the mortgages and was responsible for taking any necessary enforcement action. 

The Court held that the securitisation was properly effected and that it did not in any way alter the plaintiffs’ obligations to the Bank, which had stepped into the shoes of BOSI after the merger. Importantly, the Court held that as the legal title to the charge was held by the Bank, the Bank was the proper body to appoint a receiver.

Central Bank Codes

The plaintiffs sought to argue that they were relieved from their obligations to repay in circumstances where they alleged that the Bank had failed to comply with the Central Bank of Ireland Code of Practice on the Transfer of Mortgages. The Court refused to accept that non-compliance with a voluntary code, such as the Code at issue, could have the effect alleged. It held that non-compliance did not relieve a borrower from repayment obligations nor could it deprive a lender of its rights under the loan agreement, and that in any event, the plaintiffs had failed to establish any breach of the Code. The Court also held that a further Central Bank document (Asset Securitisation) was of no relevance as it did not apply to the relationship between a borrower and lender.

Cross-Border Merger

A common thread running through the plaintiffs’ submissions was that the Bank could not enforce loans made between BOSI and its customers. However, the Court noted that if this were the case, the Cross-Border Merger Regulations would have the unintended effect of impeding rather than facilitating cross-border mergers. Mr Justice McGovern held that after the merger the Bank effectively stepped into the shoes of BOSI, enjoying the same rights as BOSI in relation to its customers.

Registration of Title Act

The plaintiffs complained that the receiver was not appointed by the registered owner of the charge, which at the relevant time was BOSI. They argued that the transfer of the charge from BOSI to the Bank should have been registered under the Registration of Title Act 1964.

The Court found that the 1964 Act had no application to the case as the transfer of the charge to the Bank in this instance occurred by operation of law rather than by way of instrument of transfer. Further, the Court noted that the receiver was appointed under a deed of charge and his authority derived from contract and not from any statutory power. The Court commented that the Property Registration Authority’s approach to charges following a cross-border merger – which in this case was to act on a BOSI charge as if it was registered by the Bank – was sensible, practical and not legally deficient in any way.

Overcharging of Interest

The plaintiffs sought to argue that had they not been overcharged, they would not have been in arrears and would have been able to manage their accounts. It was accepted that an error on the Bank’s part had resulted in the plaintiffs being overcharged interest on three of their loan accounts. However, the error had been identified by the Bank and the plaintiffs had been refunded a total of €20,735 (which included 8% interest) prior to appointment of the receiver in 2011. Mr Justice McGovern stated that the plaintiffs’ argument did “not stand scrutiny” and he observed that they had gone on a “spending spree” with the surplus monies released to them by the refinancing with BOSI.

Receiver’s Duty

The plaintiffs claimed damages for loss of rental income arising from the fact that the receiver had sold four of the six secured properties in a falling market. The Court was satisfied on the evidence that the receiver had acted prudently and that the plaintiffs had no cause of action against him. The Court accepted that the receiver had taken reasonable steps to achieve the best price available in the market at the time of the sales and that he could not have predicted that the market would show signs of recovery in the near future.

Conclusion

This judgment is a helpful addition to the growing body of caselaw concerning claims by borrowers who raise vexatious and unmeritorious arguments against financial institutions. The case has obvious implications for the many similar cases which are currently before the Courts, particularly those in which plaintiffs allege that the securitisation of their loans bears on their duty to repay or undermines enforcement measures taken against them by their lender.

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