Court of Appeal set aside major UK bank’s summary judgment on liability on the basis of fraudulent evidence given at the hearing

Posted on: May 13th, 2013

The Royal Bank of Scotland –v- Highland Financial Partners LP & others

In a recent case before the Court of Appeal concerning the recovery of loan advances made under collateralised debt obligations, the claimant bank was found to have obtained summary judgment by giving fraudulent evidence. As such, all prior judgments of the High Court and Court of Appeal on liability and quantum had to be set aside. Further, the trial judge had been right to refuse the bank an anti-suit injunction against the defendants preventing them from pursuing proceedings in the USA as the bank had behaved inequitably.

Background

The defendants had arranged a collateralised debt obligation (CDO) involving the acquisition of a portfolio of loans and the issuance of securities by a special purpose vehicle. The claimant bank financed the purchase of the loans. When the financial markets collapsed in 2007, the securities were never issued and the transaction failed. The interim servicing deed provided for the sale of the loans by the bank, which instigated a market auction process, but purchased all the loans itself. It then sought to recover the shortfall from the defendants and obtained summary judgment on liability.

In the subsequent proceedings to determine the quantum of credit due to the defendants as a result of the auction by the bank, it became evident the bank had kept the loans and transferred them from its trading book to its banking book before the auction process, and as such the process was a sham, putting the bank squarely in breach of contract and its duties as mortgagee. It was further claimed no shortfall would have arisen if the loans had been properly auctioned. The judge at the quantum hearing while acknowledging the bank’s misconduct, held that the defendants nevertheless owed some amount to the bank.

Following that judgment the defendants commenced proceedings in Texas alleging fraud. The bank applied for an anti-suit injunction, and the defendants cross-applied for the original judgment on liability to be set aside. The defendant’s application was dismissed and the judge held that the Texan claim was within an exclusive English jurisdiction clause but the bank had “unclean hands” and so was not entitled to an anti-suit injunction. Both parties appealed.

Court of Appeal Decision

The Court of Appeal dismissed the bank’s appeal and unanimously allowed the cross-appeal allowed. Their lordships noted that there had been more than mere concealment of the transfer of the loans before auction; it was clear that the bank’s witness intentionally misled the court as to the providence of the loans at the liability hearing. As such, had it not been for the dishonest concealment of the true position, summary judgment would not have been granted on liability. The liability judgment was to be set aside as being obtained by fraud. The quantum trial, conducted on proper evidence, was therefore no longer relevant. Further, in view of the bank’s witness’ position within the bank, the trial judge had been entitled to conclude that the claim by the bank for an anti-suit injunction was sufficiently tainted as to be denied under the “unclean hands” doctrine.

Comment

This case illustrates the need for a party seeking equitable relief to come with “clean hands” or face having that relief denied.

More importantly this case is believed to be the first in which a UK bank has had a judgment set aside on the basis of fraud, and provides a strong precedent setting out when a summary judgment may be set aside on the basis of fraud.

The decision also underlines the absolute requirement of making truthful disclosure to the court. Where a party that fails to disclose relevant facts which may be of central importance to the claim, it does so at great risk.