Colliers facing High Court battle over CMBS valuation test case

Colliers International is facing the prospect of trial in the High Court of Justice in London following a claim by the issuer of a securitisation originated by Credit Suisse seven years ago, which is seeking to recover losses to noteholders due, in part, to a disputed property valuation.

The Queen’s Bench Division Commercial Court has, in a stamped report dated 3 May 2013, denied defendant Colliers’ request for a trial of preliminary issues surrounding liability of losses incurred due to time constraints.

Colliers has been required to provide the valuation file for the property at the centre of the legal dispute, known as Quelle Nurnberg, as well as standard and case-specific disclosure, by this Friday.

The complexity of the case is considerable because it has the potential impact for a ruling in favour of the claimant, the Titan Europe 2006-3 plc SPV, and so far in the history of European CMBS there have never been any legal rulings against valuers over inflated valuations of commercial properties for which the debt was securitised.

In a summary of the order, signed by both claimant and defendants solicitors – Rosling King and Reynolds Porter Chamberlain, respectively – it is agreed by both sides that Colliers International was instructed by Credit Suisse First Boston Europe on 3 November 2005 to value the retail, industrial and office property in Nürnberg, Germany.

Six weeks later, on 15 December, Colliers provided an independent valuation of €135m for Quelle Nurnberg, purpose-built for the long-term tenant between 1953 and the late 1960s, Quelle AG, a specialist mail order company which formed part of the department store group, Karstadt.

Based on Colliers’ €135m valuation, Credit Suisse structured a two-tranche senior loan – a €99.35m senior loan and a €9.73m junior loan – and pooled the senior loan into Titan Europe 2006-3 CMBS, sold over May and June 2006.

The subsequent bankruptcy of the Dutch property company which owned Quelle Nurnberg, Valbonne Real Estate B.V. as declared by an Amsterdam Court on 10 November 2011, and the insolvency of the property’s long-term tenant, Quelle AG, have coincided to test the distressed workout process of a European CMBS in a manner not seen before.

Hatfield Philips, the special servicer, commissioned an updated valuation on Quelle Nurnberg in early 2010, with a different unnamed valuer, and given the insolvency of Quelle AG – for which the property was purpose built – the valuation had dramatically fallen by €91.4m to €12.5m, reflecting a fall in value of 89.2%.

The following November, in 2011, the borrower, Valbonne Real Estate, was declared bankrupt, leaving the issuer of the CMBS to seek recourse through the legal system.

The Titan SPV “accepts that its capped loss is €54m”, reflecting the likely recourse sought from Colliers. The €9.73m junior loan, outside the Titan CMBS, is also wiped out.

Among the issues which need to be resolved in an effort to pass a legal ruling, the summary order states that it is required to establish: “Did Colliers know or ought Colliers reasonably to have anticipated that the [valuation] report might be used and relied upon by Credit Suisse in a securitisation that took place approximately six months later than the date of the report?”

The summary added: “Did Colliers owe a duty of care? If a duty of care was owed to Titan what loss (if any was suffered by Titan) fell within that scope of duty?”

Furthermore, the summary order asks whether there was a likely material valuation change between the date of the Colliers valuation and the closing of the CMBS deal.

“Did Colliers act in breach of duty if it is found that the valuation of the property at €135m on 15 December 2005 was one which no reasonably competent valuer could have reached?”

Continuing, seeking to establish Titan’s own internal due diligence, the summary order asks: “Did Titan know that by 27 June 2006 the [valuation] report might not reflect the current conditions relating to the property?”

In addition: “Did Titan regard the possible change in condition relating to the property as so significant that the inclusion of an express disclaimer in the offering circular?

“Was Titan guilty of contributory negligence because the [valuation] report was not allegedly prepared for the purpose as to its participation in the securitisation?”

Ultimately, this legal ruling will seek to apportion liability, either to Colliers, or to vindicate Colliers, or possibly attribute some level of shared liability.

“If Titan suffered a loss, is that loss recoverable in tort against Colliers? If a loss is recoverable as against Colliers, what is this measure of loss to be applied?,” asked the summary order.

Valuers, CMBS bond investors, issuing banks, as well as loan servicers, lawyers and restructuring firms throughout Europe will all be paying close attention to the upcoming ruling, with its implications for other workouts coming down the track palpable.

Signed statements of witness of fact must be made by no later than 18 October, with expert meetings held by 13 December, before a six week period between 20 December and 31 January next year is set aside as a period for settlement negotiations.

If a settlement is not reached in this period, an estimated 10-day trial will result, at a date to be established after 21 April 2014.

Colliers was unable to comment.

About CoStar News

Finance Editor, CoStar News
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