CASE UPDATE: RBS v Highland Partners LP & Ors

[2013] EWCA Civ 238

Successful appeal against bank which obtained judgments by fraud and dishonesty

On 12 April 2013, the Court of Appeal held that judgments obtained previously by RBS in the Commercial Court against Highland had been obtained by fraud and, due to the dishonesty exhibited by RBS, refused to allow anti-suit injunctions sought by the bank in relation to proceedings brought by Highland and Scott Law in Texas.

Factual Background

Between 2006 and 2008, RBS, like many other banks, was heavily involved in funding structures based on financial derivative products such as CDOs (Collateralised Debt Obligations). As was common practice, the Texas-based Highland group of companies launched a CDO issued by an SPV. RBS was to be the "Advisor" to the transaction and would finance the purchase of the portfolio, in this case consisting mainly of European Senior Secured Loans, to be held by the SPV issuer. The loan portfolio would provide security for the Notes that were issued by the SPV issuer under the CDO and the sale of the Notes would eventually reimburse RBS for the initial portfolio financing. In 2009, RBS bought a claim for money it said it was owed following the termination of this CDO transaction. Upon what RBS claimed was the realisation of the collateral under the CDO transaction documentation, RBS issued proceedings against Highland for the shortfall it was owed. RBS obtained summary judgment on liability for the claim in February 2010, which was then affirmed by the Court of Appeal in July 2010.

A further judgment in respect of quantum was obtained by RBS in December 2010. However, during these proceedings, it came to light that RBS' claim was not based on genuine sums received from the sale of the collateral. Under the CDO transaction documentation, RBS was obliged to auction off the collateral in order to recover sums it was due. However, on 13 October 2008, an amendment to International Accounting Standard 39 came into effect which permitted the banks to transfer, on a one off basis, certain assets on their trading book to their banking book before 31 October 2008. In order to take advantage of this amendment, RBS decided it would buy 36 of the portfolio loans and transferred these loans from its trading book to its banking book on 31 October 2008 prior to the auction sale taking place. RBS then conducted what Burton J called a "sham auction" to determine what credit to give to Highland for the 36 loans.

Following the...