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Horn & ors v Commercial Acceptances Ltd

[2011] EWHC 1757 (Ch)

Neutral Citation Number: [2011] EWHC 1757 (Ch)
Case No: HC10C01212
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 08/07/2011

Before :

MR JUSTICE PETER SMITH

Between :

(1) Trevor Charles Horn

(2) Carlo Dinardo

(3) Rowanmoor Trustees Ltd

Claimants

- and -

Commercial Acceptances Ltd

Defendant

Edmund Cullen (instructed by Forbes Anderson) for the Claimants

Hugh Jackson (instructed by Mishcon de Reya) for the Defendant

Hearing dates: 22nd 23rd and 24th June 2011

JUDGMENT

Peter Smith J:

INTRODUCTION

1.

This case in essence is a dispute between the parties as to the allocation of losses arising out of the realisation of securities over a number of flats. The losses have ensued as a result of the collapse of the property markets following the global financial crisis in 2008 and the consequent reduced realisations of securities. Approaching cases like this it is always essential to avoid over using the so called advantage of hindsight. Transactions that looked bad after the realisations had taken place did not necessarily look like that when they were put in place. The transactions that are the subject matter of the present claim for example took place in 2006 and apart from one or two people with Cassandra like doom laden forecasts of the collapse of the world economy most people would not have expected a property market to fall as much as it did after 2008. In the instant case the properties fell by nearly 30%. On the realisations that has resulted in the Defendants (according to their case in contention) not suffering any loss and the Claimant sustaining a substantial loss.

2.

To set out the figures briefly the Defendants on 4th October 2006 offered a loan to Messrs Nwamu and Ogburu of £2,186,000 to be secured on 4 flats at 100 Kingsway London N12. It was a 90 day loan with interest payable at 2.5% pa above Barclays’ base rate and a “facility fee” of 1.5% per month (reduced to 0.75% per month while the facility was not in arrears or default). The Defendants receive valuations of £2,854,000 (open market value) and £2,572,000 (90 day value or “forced sale”). The arrangements were that the Defendants lending criteria did not permit it to make loans in excess of 75% of the loan to value ratio (“LTV”) of the security (valued at its forced sale value); the role of the Claimants enabled the Defendants to offer loans up to 85% LTV. This enabled the Defendants to charge a higher rate of interest. The Claimants were to contribute what has been described in the case before me as “top up lending”. It was not syndicated lending where all parties would contribute rateably and take the risks rateably. The Claimants were to make the riskiest part of the lending in that their loans were to be repaid only after the Defendants had obtained repayment of its capital.

3.

The arrangements were governed by an agreement dated 19th April 2006 (“the Loan Agreement”); an umbrella agreement which covered over 50 transactions.

4.

Initially the information sheet provided by the Defendant to the Claimants identified the Claimant’s contribution as £385,800 (i.e. 15% of the LTV). This was approved by Mr Horn. I will say a little bit about Mr Horn’s involvement in the processes later in this judgment. Mr Hertz a director of the Defendant who gave evidence before me subsequently noticed that the overall LTV on the loan was stated to be 80% when it should have been 85%. That error left the Defendant short of 5% of the LTV (or £128,400). Mr Hertz emailed Mr Miller (the Claimants’ then Financial Advisor) raising this issue and saying either the Defendant would cover it or the Claimants could cover it. Mr Miller emailed back within a matter of 3 minutes agreeing that the Claimants should contribute the extra required £128,400 making the Claimants’ total contribution of £514,200.

5.

The senior amount which the Claimants contend they understood that the Defendant would be providing in its entirety was £1,671,800.

WHAT ACTUALLY HAPPENED

6.

Instead of the Defendant lending the entirety of the first tier debt it only paid half of it. The balance came from a Mr David Goldstein who was a friend of one of the Defendant’s then directors. That investment was pursuant to a trust deed the Defendant entered into with Mr Goldstein on or about 20th October 2006 (“the Goldstein Trust Deed”). I will deal with that Trust Deed and the Claimants/Defendant documentation further in this judgment.

7.

The Claimants did not know that Mr Goldstein was providing half of the first tier debt. There was a dispute as to whether or not the Claimants were aware it was a possibility but I will deal with that further in this judgment. I am quite satisfied however that having heard Mr Miller (who was actually called by the Defendant and not the Claimants his client) and Mr Hertz that the Claimants did not find out about Mr Goldstein’s involvement until after the properties had been realised and the losses had crystallised.

8.

The borrowers failed to make the repayments within 90 days and over the next ensuing year the flats were sold (one of them to Mr Goldstein). That was slightly surprising but at the end of the day the Claimants do not make any complaint about that acquisition. I suspect they accept he paid a full price. The total realisations from the sales were £1,792,450. After the deduction of some costs the Defendant paid Mr Goldstein £835,900 and recouped an identical amount for themselves. That left a balance of £101,708 which was paid to the Claimants. The difference between that and the trustees contribution is £412,492 which is the Claimants’ loss and which they seek to recover by the action.

THE CLAIMS IN OUTLINE

9.

The Claimants put their claim in 3 alternative ways. First they contend that under the construction of the Loan Agreement they are entitled to be paid their £514,200 after the actual contribution made by the Defendant (“the CA Contribution”). As the CA contribution was actually only £835,900 the Claimants contend that their figures of £514,200 should be paid next but before the monies paid to Mr Goldstein. The Claimants contend that whatever arrangements were put in place between the Defendant and Mr Goldstein are irrelevant; under the terms of the Loan Agreement only the contributions actually made by the Defendant and the Claimants are relevant and that the Defendant cannot deduct their liability to Mr Goldstein under a different arrangement to which the Claimants were not a party before arriving at a net figure (or rather a loss figure) when accounting to the Claimants.

10.

The second basis of the Claimants’ claim is based on rescission. Under the terms of the Loan Agreement each party had an express duty to act in good faith with each other. Under that obligation the Claimants contend that the Defendant had a duty to inform them that they were not proposing to provide the entirety of the first tier debt. The Defendant thus having failed to disclose that the Claimants are entitled to rescind the agreement and have the monies that they advanced (or in reality sums representing the same because there is no proprietary or tracing claim) repaid to them with an appropriate level of interest.

11.

The third basis on which the Claimants seek to recover is by way of damages for breach of the Loan Agreement or for breach of the Defendant’s fiduciary duty owed to them. The difficulty with this head in my view is that it requires an assessment by the Court both for breach of the agreement and for breach of any fiduciary duty on the basis that the Court should assess the damages on the basis of what the Defendant ought to have done but what it failed to do and what loss ensued there from. If the Defendant had complied with the terms of the Loan Agreement it would have put up the entirety of the first tier debt. After various skirmishes during the trial the Claimants acknowledged that at all material times if the Defendant had been required to contribute the entirety of the first tier debt it had the resources so to do. If the Defendant had contributed the entirety of the first tier debt then the result would have been the same except that Mr Goldstein would have disappeared. Thus the Claimants would have lost their monies precisely as the Defendant contends they have. It is the argument of the Defendant that on this analysis the Claimants do not suffer a loss by reason of the alleged breach of contract or breach of fiduciary duty but in reality by reason of the fall in the value of the property and their willingness to have their repayment postponed to that of the first tier debt. This in my view is entirely persuasive and I heard nothing during the course of the trial nor in Mr Cullen’s written and oral submissions at the end to persuade me that that is not the correct position.

CLAIMANTS’ BACKGROUND

12.

The Claimants bring the claim as trustees of the Horn Productions Ltd 1983 Pension Scheme. At the time of the agreement the subject matter of the dispute the Trustees of the scheme were the First Claimant (Mr Horn) his wife Jill Sinclair and James Hay (Pensions Trustee) Limited. The latter was replaced by the Third Claimant on 9th June 2006. Ms Sinclair suffered a tragic accident on 25th June 2006 which has left her in a permanent vegetative state. She was replaced as trustee by Mr Lyons. He has recently retired and I made a consent order at the start of the trial replacing his name as Claimant with that of Carlo Dinardo to substitute him as Second Claimant.

13.

Up until her tragic accident Ms Sinclair carried out all the decisions about investments and the like. Mr Horn has worked in the music industry since the late 1970s. Initially he worked as a songwriter, recording artist and performer. He is best known as the lead singer of the Buggles whose most famous song is “Video Killed the Radio Star”. Thereafter he became an extremely successful record producer although he still is a songwriter, recording artiste and performer.

14.

Although he has been a trustee of the pension scheme since its inception the reality is that he has no involvement in the pension trustee decisions and simply did what his wife and latterly Mr Miller advised. Mr Miller was retained by the group as Head of Business Affairs. He was married to Ms Sinclair’s cousin. He introduced the Claimants to the Defendant.

15.

The extent of Mr Horn’s lack of understanding of the arrangements is shown by the fact that when he gave evidence he thought that the Loan Agreements were always syndicated i.e. the losses were born pari pasu. This was never the case and indeed is made explicitly so in the documents which he signed. The key Loan Agreement dated 19th April 2006 was entered into when Ms Sinclair and Mr Miller were providing the financial advice. However a total of some 50 or so transactions were entered into. Of those only 17 took place before Ms Sinclair’s accident. The bulk of the loans took place when Mr Horn was the person responsible for making the decisions both in terms of number and size. The loans the subject matter of the dispute were five times higher than any other loan and represented in total nearly 25% of the total sums advanced under these arrangements.

16.

Two further matters are significant to note. First, apart from one other small loss referred to in paragraph 38 of Mr Hertz’s witness statement, of the 50 or so transactions it was only these two that produced a loss. Second it was only in these two transactions that a person like Mr Goldstein was introduced. All the other transactions took place where the only investors in question were the Claimants and the Defendant. Having seen Mr Horn and Mr Miller give evidence it is plain that Mr Horn did not make any inquiries as to the transactions and was simply led into them by Mr Miller. The same regrettably in my view was also true of Mr Miller. Although the Defendant made available (if requested) various information such as surveys, valuations and reports on title in effect Mr Miller made his decision solely on the basis of a one page information sheet provided to him. That information sheet simply summarised the transaction and did not go into any details of the valuations and the like as to how they had been arrived at. Mr Miller therefore essentially backed the Defendant’s investment record. In that he was justified save in respect of these two transactions.

17.

I am not criticising the Defendant because these are decisions made by Mr Miller and Mr Horn not to make any of the requisite enquiries. I can well understand that action being taken in 2006. The property market was rising and there was nothing to suggest the property market was even going to stabilise. The LTV of 85% would have provided a further cushion. In that market over a short term loan of 90 days it is unlikely indeed (unless there was something seriously wrong with the property) that anyone would expect a property to devalue by at least 15% below the forced sale value in such a short period. As I have said however that is what happened in this case.

INTEREST

18.

Under the terms of the arrangement the Claimants were paid a flat rate of 9% per annum over Coutts & Co base rate on their investment. It was paid when the loan was redeemed. That was a contractual entitlement although the evidence showed that the Claimants actually were credited with a monthly credit which was then compounded so that their rate was actually better than that. The Defendant however used the Claimants’ investment to charge a higher rate as I have set out above. The actual rate charged by them could achieve close on 20% (including the monthly fee). Thus they made a turn on the Claimants’ investment. That too was spelled out in the documentation and the Claimants knew and understood it. It reflects partly the fact that the Defendant had the responsibility of managing the operation and investigating the worth of the targets and the like. Paradoxically of course Mr Goldstein who invested had none of those burdens but obtained precisely the same return as the Defendant. Thus Mr Goldstein made a profit on the Claimants’ money when they did not know he was even involved. By reason of the tiering those that made the most were actually at the lesser risk. That has been demonstrated by the facts of this case. The property realised less than 85% of the LTV on the forced sale valuation. However it realised in excess of 65% so that the Defendant and Mr Goldstein recovered all of their capital whereas the Claimants lost nearly 80% of their capital.

THE MAJOR ISSUE

19.

The major issue is whether the introduction of Mr Goldstein without the knowledge and agreement of the Claimants constituted a breach of the various duties summarised above.

THE DEFENDANT: AN OVERVIEW

20.

The Defendant was established in 1982 as a “non status” short term (i.e. bridging) finance provider and it was authorised at all material times and regulated by the Financial Services Authority (“FSA”). As a non status lender it focused primarily on property when determining a loan and secondly on the individual. Thus it did not focus on the client’s earnings and financials; it had primary evaluation of any loan by reference to the value of the security. It fastened on a LTV of 75% to provide it with a significant cushion in the event that the borrower defaulted. Further of course the loan was short term in the sense that the loans were to be paid within 90 days. However the loans as Mr Hertz set out were almost invariably renewed but of course the renewing would be at the Defendant’s decision and not the borrowers. Thus if there were arrears or the like presumably the Defendant would not renew.

21.

It currently has a total loan book of £140,000,000. In 2008 it became part of the Close Brothers group of companies. At the time of the transactions which were the subject matter of the claim its group had a loan book of approximately £80,000,000. Thus the Claimants’ loan contribution was a little over 2.4% of the total loan book.

22.

The commencement of the arrangements between the Claimants and the Defendant in effect arose out of Mr Miller and Mr Hertz knowing each other. Mr Hertz knew Mr Miller through his (i.e. Mr Hertz’s) father. In September 2005 Mr Hertz’s father telephoned him and said that Mr Miller had money to invest and wanted to meet with him with a view to investing with the Defendant. There was a meeting on 28th September 2005 at Mr Miller’s offices in Basing Street London. At that meeting Mr Miller indicated that on behalf of the pension fund he wished to get involved with loans that CA made. Mr Hertz explained that whilst on occasion they laid off part of the loans on a pari pasu basis they had more than enough participants. Generally Mr Hertz said the Defendants did not operate a syndicated lending business and almost as a throw away line he suggested that the only way they could work together would be if there were mezzanine arrangements i.e. top up lending. Mr Miller according to Mr Hertz’s evidence rejected it. Thereafter Mr Miller obviously had a change of heart and contact was made in autumn 2005 to arrange lending together. Later on Mr Hertz met Ms Sinclair but he never met Mr Horn. The structure was devised by the Defendant’s then (and present solicitors) Mischon de Reya and the Claimants were represented by Philip Ross. They also took advice from Counsel. It took a fair amount of time and before the arrangements were put in place an opportunity arose in respect of two terraced houses in East London. This led to the first transaction between the parties in March 2006. It was a syndicated loan. The Claimants’ investment was through one of the group of companies Sarm UK Ltd. Nothing in my view turns upon this arrangement as it was a one off and it pre-dated the Loan Agreement. It is not suggested by any party that the subsequent Loan Agreement did not reflect the arrangements nor is it suggested by either party that the Loan Agreement should be interpreted in the light of this earlier transaction. It is possible (see below) that Mr Miller with the tacit acceptance of Mr Horn operated on a different basis to that set out in the Loan Agreement.

SUBSEQUENT TRANSACTIONS

23.

After the Loan Agreement was entered into the transactions were carried out under the umbrella of that document. As I have said the Defendant sent a one page information sheet to Mr Miller and he never sought any further information beyond that information sheet. As I have already said the £128,400 top up was done in a matter of minutes.

THE LOAN AGREEMENT

24.

I set out below the relevant provisions of the Loan Agreement:-

“1 (iii) ‘CA’s Business’ means the business carried on by CA of lending money on the security of freehold or leasehold properties secured by way of Legal Charges (as defined below) on properties in England and Wales for periods not exceeding twelve months”.

“1 (iv) ‘Contributions’ means the contributions to each Loan (as defined below) made respectively by CA and the Trustees, and ‘the CA Contribution’ means the sum of money contributed by CA to each Loan, and ‘the Trustee Contribution’ means the sum of money contributed by the Trustees in respect of each loan and paid to CA for such purpose”.

25.

That is an important provision because the Claimants contend that it identifies the personal nature of the parties’ obligations in the contributions. The Trustee Contribution is the amount of money contributed by the trustees in respect of each loan and the “CA contribution” means the sum of money contributed by CA to each loan. The Claimants primary submission is straight forward; the CA Contribution means that and no more. It cannot extend to the Goldstein contribution because that is a contribution by Mr Goldstein and not by the Defendant. The Claimants acknowledge that if the money had been paid by Mr Goldstein to the Defendant and then advanced to the borrower there could be no complaint. However the Claimants contend that Mr Goldstein’s contribution is not a CA contribution unless he advances it to CA and it advances that to the borrower. In fact CA did advance the entirety of the funds initially to the borrower but then it gathered the monies in by the Claimants’ contribution and Mr Goldstein’s contribution. That factual transfer of the money does not in my view make any difference. The Defendant was merely the conduit to pass the funds. It cannot argue (for example) that because it made the payments that way that the part that was subsequently represented by the Claimants’ contribution becomes a CA contribution. It plainly did not. Equally Mr Goldstein’s contribution never became on this argument a CA contribution.

26.

Under clause 5 the respective contributions are 70% LTV (CA) and trustee 15%. Those items are maximum contributions.

27.

Under clause 6.2 it is provided that the sums if they are insufficient from the borrower to repay the loan are disbursed in the following priority:-

“6.2 (1) to repay the Contributions and (2) to discharge interest due to CA and the Trustees and (3) to discharge any fees and expenses owing to CA and the Trustees, the repayments made and the sums recovered shall be applied in the following order of priority:-

6.2.1 The outstanding CA Contribution, to CA.

6.2.2 Any reasonable fees and expenses incurred by CA wholly and exclusively in connection with the recovery of monies from the Borrower (provided always that in the event that the parties shall be unable to agree the amount of such reasonable fees and expenses the mater shall be referred to an independent expert appointed by the President for the time being of the Law Society whose opinion shall be final and binding on the parties (to CA).

6.2.3 The outstanding Trustee Contribution, to the Trustees.

6.2.4 The sum that would be payable to CA in respect of interest on the CA Contribution if CA were entitled only to simple interest (at the rate of interest specified in the Legal Charge relating to that particular Loan being the rate of interest payable on prompt payment and not any penal rate which may be specified therein) from the Borrower.

6.2.5 Outstanding interest owing to the Trustee in respect of the Trustee Contribution, to the Trustees.

6.2.6 Any fees and expenses owing to the Trustees, to the Trustees.

6.2.7 The balance of any interest due from the Borrower to CA, to CA.

6.3 In calculating the sums due to the CA and the Trustees in accordance with the order of priority set out at paragraph 7.2, CA shall bring into account all sums received from the Borrower since the inception of the Loan whether by way of capital, interest or otherwise”.

28.

Clause 7 creates a trust as follows:-

“7.1 CA will hold the benefit of the Borrower’s repayment obligations and the Legal Charges (and the Debentures where appropriate) (including all monies repaid or recovered thereunder) on trust for CA and the Trustees in accordance with the Trust Deed.

7.2 CA undertakes to execute such further assurances or documentation which may be reasonably required by the Trustees (subject to reimbursement by the Trustees of the reasonable expense of such assurance or documentation) provided such further assurance or documentation is not prohibited by law or CA’s banking covenants.

7.3 CA is authorised to perform the duties and exercise the rights, powers, and discretions given to it by the Loans and the Legal Charges (and the Debentures where appropriate).

7.4 CA may act under the Legal Charges (and the Debentures where appropriate) through its agents or employees.

7.5 CA and the Trustees do not assume and will not be deemed to have assumed any relationship or partnership.”

29.

Thus the structure is that CA has the charge and is a trustee of the powers under that charge for itself and the Claimants. The borrower does not know the charge is syndicated or there are more than merely the Defendant providing the money. That was shown by the first loan above mentioned where it was quite clear that the Defendant (through Mr Hertz) wanted the identity of other subscribers not to be revealed to the borrower. There is nothing difficult about this as the title is a registered title and the registration by the Defendant of the charge vests in it all legal rights appertaining to a registered charge see for example Paragon Finance v Pender [2005] EWHC Civ 760 (CA).

30.

Under clause 11.4 the Defendant warranted its profit and loss account for the year end of 28th February 2005 and that there had been no material adverse change since that date. Thus for example the Goldstein loan would not be shown in its books (although the books were not provided) as a liability of the Defendant to repay Goldstein. The whole object of the investment by Mr Goldstein (as is set out below) is for him to provide monies which are passed on to the borrower and he then takes the risk of the loan not being repaid in full; there is no question of the Defendant having to take that risk by reimbursing him in full.

31.

Clauses 12.1.6 and 12.1.8 prohibit the Defendant from either factoring or discounting any loan without consent of the Claimants and prohibit it from entering into any agency agreement with any third party in respect of any loan. Those provisions of themselves the Claimants contend are not decisive but once again they provide support for their contention that the relationship under the Loan Agreement was to be personal to that of the Claimants and the Defendant alone and it was not contemplated by either party that it would be possible for the Defendant to offload part of its contribution in the way that happened with Mr Goldstein.

32.

Clause 18 provides “each party shall act in absolute faith towards the other”.

33.

Finally clause 21 prohibits CA from assigning or transferring any of their rights or obligations without the consent of the Claimants. This too the Claimants rely upon as evidence in the personal nature of the relationship.

34.

The arrangements between the Defendant and Mr Goldstein did not strictly infringe any of those provisions because it operated by way of a declaration of trust. Equally it is true as the Defendant submits that there is no express provision that can be pointed to in the Loan Agreement that prevented them satisfying the first tier liability by offloading part of the obligations to a third party whether disclosed or not. Further of course the Defendant submits with some justification that if it had provided all the money (and it is not said it could not) then the Claimants would have suffered the present loss in any event.

35.

However that is not entirely the end of the matter. It was put to Mr Hertz in cross examination that if his understanding of the Loan Agreement was as submitted by the Defendant that they could offload the entirety of the first tier loan and not actually lend anything. Mr Hertz acknowledged that was not appropriate but was unable (or more realistically unwilling) to identify at what level in terms of percentage of first tier lending it would be appropriate to reveal it to the Claimants. Equally Mr Miller when he gave evidence acknowledged that he was aware that the Defendant might wish to bring in a third party partly to fund the first tier liability. He said that he would have expected it to have informed him if it reached a certain level. His evidence showed that he would have expected to have been informed if the proposed contribution was 50%. He frankly conceded he might have authorised the investment in any event even if it went to 50% but of course he was not told, was not asked and was not in a position to consent.

36.

These obligations to consult at a certain percentage are not of course provisions set out in any of the documentation. Further of course it is entirely hypothetical because it never happened. I will deal with this aspect further in the judgment.

THE TRUST DEED

37.

This document is between the Defendant (1) and Ms Sinclair, Mr Horn and James Hay (Pension Trustees) Ltd (2).

38.

The recitals state that it is supplemental to the Loan Agreement and that the purpose of the Deed is to declare the rights of the parties in respect of the loans made by CA’s Trustee for CA and the Trustees. The loans are defined as being applicable to loans made to borrowers on security of first or second charges.

39.

Under clause 1 CA declares that it holds the benefit of a Legal Charge and the debentures (“the Legal Charges”) which shall secure each loan and the redemption monies when they are received by it in trust and as trustee for CA and the trustees in the proportions that CA and the trustee shall have contributed to the loan in accordance with paragraph 5 of the Loan Agreement. There are no other provisions that are of significance.

40.

Thus the Claimants contend this reinforces their position as to the construction of the Loan Agreement. CA holds the mortgage (and the powers attached to that mortgage) upon trust for it and the Claimants and it holds the proceeds of any such mortgage upon trust for itself and the Claimants. Once again the Claimants submit there is no room for Mr Goldstein.

MR GOLDSTEIN’S TRUST

41.

The first Trust Deed that was apparently executed by Mr Goldstein is undated but appears according to the fax header to have been executed on or around 12th October 2006. It was executed after the advances were offered to the borrower. It was an erroneous document because it referred to the wrong properties. The actual one executed by him is similarly undated and still has blanks in it in the recitals.

42.

The first recital is significant because it recites that it is supplemental to the Legal Charge whereby the borrowers charged the 4 flats as security to the loan of £1,671,800 to the Defendant. This is not actually accurate. That figure represents the first tier lending; the actual figure advanced was higher. The second recital recites “the mortgagee was in fact granted the Legal Charge by [the borrowers] on behalf of itself and Mr Goldstein in the shares and proportions thereafter mentioned and the principal sum was lent by the mortgagee and Mr Goldstein in equal shares and proportions”.

43.

That too is wrong because the Defendant already bound itself by the Trust Deed to hold the charge and the proceeds of sale upon trust for itself and the Claimants.

44.

The remainder of the Goldstein Deed then purported to deal with the residue of the principal sum on a pari passu basis. Somewhat surprisingly clause 2.2.4 obligated the Defendant if requested by Mr Goldstein to apply to the Chief Land Registrar for restriction against the property. That was not included in the documentation in favour of the Claimants. There was little explanation of this in the trial because such a clause was removed from the previous transaction documentation on the basis that Mr Hertz stated that excluding it was a standard provision. Nothing turns on that in my view.

THE EVIDENCE

45.

Mr Horn gave evidence but I found his evidence of no assistance in respect of the dispute before me.

46.

Mr Hertz gave evidence. He gave the evidence in a confident manner and repeated when it was appropriate that as far as he was concerned the expression “the CA Contribution” was always understood by him to extend to any monies which the Defendant would syndicate to other third parties. I do not accept his evidence in that regard. It will be appreciated this was a one off series of transactions. It was a departure from the Defendant’s normal policy and the documentation was specially drawn up for its effect. It seems to me that Mr Hertz was repeatedly expressing that view to bolster the Defendant’s case. I reject it. In any event of course his evidence as to what the documents mean is inadmissible. In reality I do not accept Mr Hertz ever considered the point.

47.

Equally in my view having seen him it never entered into his head that the Defendant was under any obligation to inform the Claimants if they were proposing to syndicate the first tier lending. There was as his and Mr Miller’s evidence shows a vague discussion about this but there was no more. Whenever that discussion took place it was before the Loan Agreement was in existence and cannot in my view (absent a claim for rectification) be admissible evidence as to what the Loan Agreement means. Once again because the documentation was not in existence neither Mr Miller nor Mr Hertz at the time of these discussions were considering whether or not third party contributions to the first tier lending would be a possibility.

48.

Mr Miller’s evidence was vague at times. I do not believe he ever seriously addressed the question of whether there was any possibility of third parties syndicating the first tier lending.

49.

What is clear however is on the evidence of both of them the proposal for Mr Goldstein to make a contribution was not expressly revealed to the Claimants. Further it is significant in my view that this had not occurred in any of the preceding transactions. Mr Miller’s evidence really demonstrated the approach he took to the arrangements. As I have said earlier in this judgment he was anxious to do business with the Defendant because of its successful track record. It is clear on his evidence that he was content to play “follow my leader”; if the transaction was good enough for the Defendant he was quite prepared simply to contribute the appropriate amount of the Claimants’ contribution. This is well demonstrated by his speedy delivery of the top up when he was not actually asked to provide it in express terms. I do not think it ever entered into his head even to consider whether or not there was the possibility of third parties being involved at the first tier lending.

50.

Equally if the Defendant contemplated third party involvement in the first tier lending it kept it to itself. This to my mind was done deliberately in the sense that Mr Hertz believed that he did not have to disclose any such third party involvement. As I have said he had that belief but it was not based on documentation. It was simply the way in which they did business. I do not think he considered what obligations if any were put upon the Defendant if it chose to induce the third party funding of the first tier lending.

51.

When the Claimants became aware of the contribution by Mr Goldstein it was raised with Mr Hertz. According to Mr Miller’s evidence he said that the reasons for laying off part of the loan to Mr Goldstein were for “short term liquidity reasons”. To a lay person that would give the impression that the Defendant was short of cash and brought in Mr Goldstein to address that. However the Defendant denied it and ultimately the Claimants accepted that there was no shortage of cash. Mr Hertz in his evidence explained that the reason why the Defendant held back money was (like in effect a hotel holding back its best rooms) is that it wished to keep some reserves in abeyance in case there was a good opportunity that came along and that it would wish to fund. In other words the Defendant is spreading its exposure around as many loans as possible.

CLAIMANTS’ CONTENTIONS

52.

The Claimants contend that the failure to reveal the investment of Mr Goldstein is a breach of the Defendant’s duty of good faith and a breach of the fiduciary duty in respect of the loan which it owed to the Claimants.

53.

In addition the Claimants contend as a matter of construction the Defendant is not entitled to deal with the proceeds of sale received pursuant to exercise of the powers of sale under the mortgage save in accordance with the Trust Deed and the Loan Agreement. Under both those documents the Claimants contend that there is no room for any repayment to Mr Goldstein. If the Defendant chose to tie themselves to pay out Mr Goldstein without involving the Claimants that is a loss which falls upon them.

CONSTRUCTION OF THE LOAN AGREEMENT

54.

In my view the Claimants’ contentions are correct. I think it is impossible to give any commercial or sensible meaning to the expression CA Contribution as being anything other than a personal contribution actually made by the Defendant. This is demonstrated if it need be by the fact that Mr Hertz acknowledged that the Defendant could not lay off 100% of the liability. All of the discussions were between the Claimants and the Defendant about collaborating in providing funding on loans. It seems to me clear that when one looks at the wording of the various provisions as I have set out above (reinforced secondarily by the other restrictions on alienation) that the parties contemplated at all times that only the Claimants and the Defendant would be participating in the transactions.

55.

Further it is reinforced by the lack of such arrangements in all the other transactions. In addition I cannot see the Goldstein contribution as being anything other than a Goldstein contribution. The Defendant was careful to avoid assuming a liability to repay Mr Goldstein. It is clear that he was only able to have recourse to the proceeds of sale of the mortgage. The Defendant did not assume any liability to repay it; he came on board with the same risk. It is impossible in my view to stretch the CA Contribution to include a contribution that is not made by the Defendant to the lending.

56.

Given that it is inevitable that the Defendant is in breach of clause 6.2 of the Loan Agreement because it has failed to apply the realisation proceeds in the priorities defined in that clause. Equally it is in breach of clause 7.1 in that it is required to hold the monies repaid or recovered upon trust for it and the Trustees in accordance with the Trust Deed. That is slightly circular because the Trust Deed required them to hold the proceeds upon trust in accordance with clause 5 of the Loan Agreement.

57.

Accordingly I will grant judgment to the Claimants in the sums sought for those breaches. The Defendant received sufficient proceeds to discharge the capital advanced by the Claimants.

58.

That is enough to dispose of the Claimants’ claims in their favour. However in case this matter goes elsewhere I will give judgment on the other heads of claim.

BREACH OF FIDUCIARY DUTY

59.

The Claimants contend that there is an absolute duty of good faith to each other under clause 18 of the Loan Agreement. That in the context of the trust and the obligations as regards the remedies under the charge and the distribution of the proceeds gave rise to a relationship of trust and confidence such that fiduciary obligations arose.

60.

Given the contention that there was a fiduciary obligation the Claimants contend that the duty of good faith put the Defendant under a duty not to place itself in a position where its duties and interests conflicted and not to act for its own benefit or that of a third party without the informed consent of the Trustees. Mr Cullen who appears for the Claimants supported that by reference to the recent Court of Appeal decision Sinclair Investments (UK) Ltd v Versaille Trade Finance Ltd (in administrative receivership) & Ors [2001] EWCA Civ 347in particular at paragraphs 34-36 per Lord Neuberger MR. I am mindful of the need to be cautious in the imposition of fiduciary duties in a commercial contract see Bristol and West Building Society v Mothew [1998] Ch 1at page 80 per Millett LJ as he then was. I was also referred to an article by Lord Millett in 1998 LQR page 1 “Equity’s Place In the Law of Commerce”.

61.

The Claimants submit that the obligation of good faith imports a duty to disclose material facts and that it does not require dishonesty see Conlon v Simms [2008] 1 WLR 484 C.A. 484 at paragraphs 87 and 127-8.

62.

A fiduciary owes a duty of good faith. It is incumbent on such person to disclose all material facts to the other party to the contract.

63.

The material fact that the Claimants contend required disclosure was the presence of Mr Goldstein. They contend the Defendant was in breach of fiduciary duty by failing to disclose his presence as a 50% contributer to the first tier lending.

64.

It is probable on the basis of Mr Miller’s evidence that if it had been disclosed he would have gone ahead. However in my view that is irrelevant. If there is non disclosure by a fiduciary in breach of his duty the fiduciary cannot be heard to maintain the disclosure would not have altered the decision to proceed see Brickenden v London Loan and Savings [1934] 3 DLR 465at 469.

65.

This argument does not arise if the construction of the Loan Agreement is as set out above. If it is to be construed as I have determined there would be no obligation to disclose the investment by Mr Goldstein because no such investment is permitted. Consequently a duty to disclose something simply does not arise. It only arises if the Loan Agreement permits the Defendant to lay off part of the first tier lending.

66.

It is actually unnecessary in my view to determine whether there was a fiduciary obligation. Clause 18 creates an express obligation of good faith. That to my mind imports an obligation on the Defendant to disclose material facts. In the context of the relationship the position is as follows. They had entered in to a master Loan Agreement and a master Trust Deed. The Defendant then offered the Claimants opportunities which the Claimants could either take up or refuse as they thought appropriate. It seems to me that when each offer is made the Defendant must disclose all material facts as part of their duty of good faith.

67.

The Defendant submits that the obligation to disclose Mr Goldstein’s investment is not a material fact. I cannot agree with that submission. It seems to me that the Claimants are entitled to know whether or not the Defendant is funding the major part at least of the first tier lending. If it is not advancing 50% of the first tier lending it seems to me that the Claimants ought to know that because they were entitled to investigate why the Defendant was not willing to assume all of the risk. It might not have made any difference but for the reasons I have set out above that is irrelevant. The Claimants were deprived of an opportunity to make an informed decision as to whether or not to join in with this lending with full information as to who was going to contribute.

68.

Accordingly I determine that the Defendant was in breach of its duty of good faith expressly set out in clause 21.

69.

There is therefore no need or room for an overriding fiduciary duty. The contract sets out the obligations.

70.

I do not accept that the Claimants’ risks were solely limited to the security as the Defendant submitted. It seems to me that the Claimants were entitled to know fully who was involved in the funding. For example whilst they might have been willing for the Defendant to make a profit on the interest rate because it was administering the loans and had that burden it is conceivable that they would not have agreed simply to their funding being used by Mr Goldstein to have a profit on the interest that he would charge for his part of the first tier lending. At that stage the Claimants might well have said that they wished to be pari passu with all other investors. I do not know and it does not matter for the reasons I have said.

71.

Accordingly there is no room for a finding of a fiduciary for those reasons.

72.

I should say something about the Defendant’s submission as to the duty of good faith. It was submitted by the Defendant that for there to be a breach of the obligation of good faith requires dishonesty. The Defendant relied upon the decision in the Court of Appeal in Medforth v Blake [2000] Ch 86at page 103B (a decision which I have some familiarity with). At paragraph 103 (B) of his judgment Sir Richard Scott VC (as he then was) said this:-

“In my judgment, in principle and on the authorities, the following propositions can be stated:-

(1) A receiver managing mortgaged property owes duties to the mortgagor and anyone else with an interest in the equity of redemption.

(2) The duties include, but are not necessarily confined to, a duty of good faith.

(3) The extent and scope of any duty additional to that of good faith will depend on the facts and circumstances of the particular case.

(4) In exercising his powers of management the primary duty of the receiver is to try and bring about a situation in which interest on the secured debt can be paid and the debt itself re-paid.

(5) Subject to that primary duty, the receiver owes a duty to manage the property with due diligence.

(6) Due diligence does not oblige the receiver to continue to carry on a business on the mortgaged premises previously carried on by the mortgagor.

(7) If the receiver does carry on a business on the mortgaged premises, due diligence requires reasonable steps to be taken in order to try to do so profitably.

In my judgment, Judge McGonigal’s answers to the preliminary issue were, with one or two minor qualifications, in accordance with principle and correct. The minor qualifications are these:-

(i) The judge held that a receiver’s power to manage a business was ancillary to the power of sale. I do not think it is. I would agree that in many cases, a receiver will manage a business in order to bring the mortgaged property to a state in which the business can then be sold as a going concern. But the power to manage is, in my view, independent of the power to sell. A receiver can manage a business for the purpose of generating profits from which the secured debt can be discharged. The management of the business does not have to be ancillary to an intended eventual sale. But I agree that in the management of the business an equitable duty of care is owed.

(ii) I do not think that the concept of good faith should be diluted by treating it as capable of being breached by conduct that is not dishonest or otherwise tainted by bad faith. It is sometimes said that recklessness is equivalent to intent. Shutting one’s eyes deliberately to the consequences of what one is doing may make it impossible to deny an intention to bring about those consequences. Thereapart, however, the concepts of negligence on the one hand and fraud or bad faith on the other ought, in my view, to be kept strictly apart. Equity has not always done so. The equitable doctrine of “fraud on a power” has little, if anything, to do with fraud. Lord Herschell in Kennedy- v –de Trafford gave an explanation of a lack of good faith that would have allowed conduct that was grossly negligent to have qualified notwithstanding that the consequences of the conduct were not intended. In my judgment, the breach of a duty of good faith should, in this area as in all others, require some dishonesty or improper motive, some element of bad faith, to be established”.

73.

Thus it is submitted that dishonesty or improper motive needs to be established.

74.

I was not referred to any authorities subsequent to that decision. It must be appreciated that the observations were obiter as the primary decision was that the Receivers owed a duty of care and not merely a duty of good faith (the Court of Appeal rejected that submission).

75.

The case was considered in Niru Battery Manufacturing Company & Anr v Milestone Trading Ltd & Ors [2003] EWCA Civ 1446. In that case the Court of Appeal rejected the concept of breach of good faith being equivalent to dishonesty alone see paragraph 150 per Lord Justice Clarke and paragraphs 177-181 per Lord Justice Sedley.

76.

It seems to me to be correct that the court was not suggesting in Medforth that dishonesty was an essential pre-requisite for a finding of bad faith. It seems to me that one looks at the relevant conduct and decides whether or not that conduct is such as to be a breach of the duty of good faith. That does not necessarily in my view lead to a finding of dishonesty as a pre-requisite. Nor does it seem to me to be essential to establish that the person understood he was acting in good faith and did it deliberately on that basis. It is clearly established for example that a party can be found guilty of dishonest assistance even though he did not subjectively believe he was being dishonest see The Attorney General of Zambia v Meer Car & Desai & Ors [2008] EWCA Civ 1007at paragraph 21.

77.

I therefore reject the submission that dishonesty has to be established for a person to be in breach of good faith.

78.

In case I am wrong in that respect having heard Mr Hertz I do not believe he was dishonest. I have rejected his evidence that he thought he was operating in accordance with the Loan Agreement. That is not to say that he was dishonest. I have found that he did not really consider the documentation and simply operated in the way in which he always did in transactions namely that how the Defendant funded a loan was a matter for it and it alone. He therefore made a conscious decision not to disclose the existence of the funding by Mr Goldstein. That was not dishonest on his part but it was a breach of the duty of good faith and would also be breach of a fiduciary duty if there was such a fiduciary duty.

79.

Accordingly if this were relevant I would determine that the Claimants would be entitled to rescission of the Agreement for breach of fiduciary duty.

RESCISSION NOT AVAILABLE

80.

The Defendant submits that rescission is not available because the loan and associated security having ceased to exist and the Claimants having accepted £100,000 from the proceeds of sale restitution is not possible.

81.

I do not accept that. Rescission in this context does not mean that the Defendant has to repay the actual monies that were handed over. Those monies became the Defendant’s monies when they were paid in to its bank account by the Claimants. The Defendant may well have become subject to an obligation to utilise those monies solely for the purpose of lending them on but that is not an issue before me. However if this agreement had been rescinded the Claimants are entitled to be put in the position as if the Agreement was never in existence. That is not repayment of the original amount it is repayment of an equivalent sum: see Independent Trustees Services Ltd v GP Noble Trustees Ltd & Ors [2010] EWHC 3275 (Ch) at paragraphs 47 and following and paragraph 54 especially. There is no doubt of the Defendant’s ability to repay an equivalent sum. There is no proprietary issue here; the Claimants simply want an equivalent sum repaid back to them. I therefore reject the Defendant’s submission that there is any bar to rescission.

DAMAGES FOR BREACH OF AGREEMENT/DUTY OF GOOD FAITH

82.

It is important to see the plea. The Claimants plead that the Defendant in entering in to an arrangement with Mr Goldstein broke the Loan Agreement and the fiduciary duties (paragraph 11 of the Particulars of Claim).

83.

The difficulty with this claim is as I have set out above. The complaint in reality is the failure of the Defendant to put up all of the funding for the first tier lending. There is no issue that it could have done so. Had it done so the Claimants would have suffered the present loss which arises not from that breach but from the decline of the securities.

84.

Accordingly in my view the Claimants are entitled to damages for breach of the Loan Agreement and for breach of the obligation of good faith but they are only entitled to nominal damages.

85.

That is of course the contrast between the requirement to prove causation and loss with (for example) the duty to account which falls upon the Defendant under the terms of the Trust Deed and the Loan Agreement for the proceeds of sale it has received in accordance with the terms of those two documents.

86.

I will Counsels’ submissions as to the form of the order in the light of this judgment.

Horn & ors v Commercial Acceptances Ltd

[2011] EWHC 1757 (Ch)

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