The decision of HHJ Keyser on 14 December 2011 in Paratus AMC Limited & RMAC 2005 NS1 PLC v Countrywide Surveyors Limited [2011] EWHC 3307 (Ch) is exciting comment in the trade press. The decision is of general interest to lenders who are bringing claims against valuers or solicitors and is of particular interest to those bringing claims in respect of loans made by GMAC RFC Limited (now Paratus AMC Limited) or other sub-prime lenders. The decision itself is uncontroversial as the defendant was found not to have negligently overvalued the property; what are of interest are the judge’s ruling on the recoverability of the loss in light of the consequences of loan’s securitisation; and his comments on both the quality of GMAC's underwriting for the purposes of contributory negligence and on the market approach adopted by sub-prime lenders at the height of the property boom.
We must stress that Paratus was a first instance decision and the judge's comments on contributory negligence were either fact-specific to the case or made obiter dicta, so they are not binding on any successive cases. The fact remains, however, that defendants will seize on the Judge’s comments and are likely to use them as justification for taking a harder line on contributory negligence than one might have been expected previously. In general terms, we have been advising our clients to expect a deduction of between 30% and 60% for contributory negligence on GMAC-originated loans, depending on the particular facts of each case. HHJ Keyser said that he would have applied a deduction of 60% to Paratus’s damages on the specific facts of this case, had he been required to do so.
The margin of error applicable to the original valuation
The property which was the security for the advance was a 'standard' new-build flat within a development of purpose-built flats. The judge accepted the general principle that the valuer's margin of error on a standard residential property may be as low as +/- 5%. He however concluded that the margin of error in these circumstances should be 8%. Factors which he took into account in determining the margin of error were: the general acceptance by the Courts and parties of a 'normal' margin of error of 10%; the fact that there was a lack of clear and consistent comparable evidence in these particular circumstances and the fact that the property market for both the area in which the property was situated and the development in question had been volatile at the time.
Securitisation of the loan meant that neither claimant had the right to bring a claim?
Countrywide raised a technical argument that neither GMAC nor the securitisation vehicle, RMAC, had the right to bring the claim. As regards RMAC, Countrywide argued that it had suffered no loss because any losses sustained by the RMAC portfolio were borne GMAC as the Residual Holder. As regards GMAC, Countrywide argued that it had suffered no substantial loss at the date of the assignment of its cause of action to RMAC and further, was unable to maintain a claim for its own losses because it had assigned to RMAC its cause of action. In so far as GMAC was purporting to be the legal owner of the cause of action, argued Countrywide, it was seeking to recover its own losses and those of RMAC. The judge rejected Countrywide's argument. The judge went on to rule that he would still have found for GMAC and RMAC even if Countrywide's argument had had some technical merit, as it would have been both unjust and commercially inconvenient to have allowed Countrywide, if it had been negligent, to have escaped liability merely as a result of the strict application of technical rules on assignments. In coming to this conclusion, the judge obtained assistance from the principles set out in Offer-Hoar v Larkstore Ltd [2006] EWCA Civ 1079.
The judge's comments reinforced the position we have taken with defendants who have asserted that the assignment of the right to sue was defective or ineffective and/or that no loss was suffered by the claimant by reason of the securitisation of the loan. The judge was in effect emphasizing the general principle that the person(s) with the benefit of an assignment of a loan should be entitled to stand in the shoes of the original lender and bring any claim which the original lender would have had the right to bring if it had not sold the loan.
Contributory Negligence
The judge commented that the standard of care to be applied to GMAC was that of an originator in the sub-prime market at the time and not that of a prime mortgage lender. He did not believe that GMAC's practice of making loans at a 90% LTV on a self-certified basis was negligent as, on the evidence before him, it was commonplace within a significant, though small, sector of the sub-prime market at the time.
The judge said that it was an open to a Court to hold that a practice adopted by a sector of the lending market (e.g. lending at high LTVs) was in itself negligent. He however believed that a Court should be very reluctant to adopt that approach, as the Court was not well-suited to assessing whether business models that had been adopted by entire sectors of the financial services industry had been reasonable.
The judge went on to review the facts of the borrower’s application and personal circumstance and reviewed GMAC’s lending policy, before concluding that a deduction for 60% for contributory negligence would have been appropriate. We would be happy to provide details of the specific criticisms that the judge made of GMAC's underwriting system, for the purposes of arguments of contributory negligence, on request.
Will this decision help or hinder lenders?
The rulings on the validity of the assignment and on the recoverability of loss on a securitised loan are helpful to lenders to whose portfolios these issues apply. We do not anticipate seeing these arguments being made with any force, if at all, by defendants, going forward. The obiter remarks made by the judge on contributory negligence are not, despite suggestions to the contrary in the trade press, catastrophic. Firstly, the judge's view was that a sub-prime lender should only be measured against the standard of care expected of a lender in that market and that a LTV of 90% was not in itself negligent. Secondly, the indication in Paratus of a 60% deduction is both fact-specific and non-binding and any suggestion by a defendant that a deduction at that level is appropriate can be countered on that basis.
