Royal Bank of Scotland Plc v Highland Financial Partners Lp & Ors

A mortgagee exercising a contractual power of sale must act in good faith, take reasonable steps to obtain market value, and conduct the sale in a commercially reasonable manner. Where the mortgagee is permitted to sell to itself, the duty requires particular care because of the conflict between securing the best price and acquiring the asset. Material information affecting the sale process must be disclosed where the contract requires mutual agreement or where nondisclosure makes the process misleading. A sham auction, in which assets already earmarked for retention are presented as available for sale, cannot establish market value. In a falling market, a speedy sale may nevertheless be reasonable; the mortgagee need not wait for a more favourable market or undertake prolonged targeted marketing.

The claim followed summary judgment on liability against Highland as borrowers and guarantor, upheld by the Court of Appeal. The hearing concerned the quantum of RBS’s claim after termination of a collateralised debt obligation transaction and liquidation of 88 acquired loans under clause 4.2 of an Interim Servicing Deed.

RBS credited the advances with proceeds attributed to loans sold to third parties and loans acquired by RBS. Highland alleged that the liquidation process was contractually and equitably defective, particularly because RBS had decided before the auction to retain 36 loans and had used the auction merely to fix their prices. The central issues were the validity of the sale process, the mortgagee’s duties, the effect of the accounting reclassification exercise, and the appropriate market values.

1. Disposition. The court rejected RBS’s accounting of the 88 loans and directed the parties to calculate the credit due by reference to the valuation methods identified in the judgment.
2. RBS owed contractual obligations to act in a commercially reasonable manner and equitable obligations as mortgagee. Those obligations included good faith, reasonable and reasonably expeditious steps to obtain market value, and disclosure necessary to permit genuine mutual agreement about the sale procedure.
3. In relation to the 36 loans, RBS had already decided to retain them before launching the BWIC. Presenting them as available for sale, while using the process only to fix their prices, made the BWIC a sham. The resulting deception, absence of mutual agreement and conflict of interest breached RBS’s contractual and equitable obligations. The 36 loans were not sold when transferred between RBS’s books; the sale occurred after the BWIC. Their value was assessed as one point above RBS’s 15 October 2008 mark.
4. The same defective BWIC could not establish market value for the remaining 52 loans. However, RBS was not required to undertake prolonged targeted marketing or wait for a better market. The appropriate values were the average of RBS’s 15 October mark, reduced by the weighted average difference for the further month, and Highland’s 11 November mark.
5. The retrospective accounting value permitted by IAS 39 did not establish market value as at November 2008. The evidence showed continuing trading and a substantial fall in loan values after June 2008.

• High Court (Commercial Court): liability was determined by summary judgment in [2010] EWHC 194 (Comm). The present judgment assessed quantum.
• Court of Appeal: the liability judgment was upheld in [2010] EWCA Civ 809.