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Dutch loan portfolio transactions: Supreme Court ruling

By on March 9, 2021 0

On July 10, 2020, the Dutch Supreme Court (Hoge Raad) clarified the legal position in Dutch law regarding the assignability of claims created under Dutch law governed by non-performing loans (NPL) and the related duty of care of the buyer of these NPLs (ECLI case reference: NL : HR: 2020: 1274). The decision provides guidance to investors who have acquired or are considering acquiring NPLs in the Dutch market, in particular with regard to behavior regarding certain key elements of the underlying loan, such as margin increases.

The decision concerns the 2015 sale of a portfolio of non-performing commercial real estate loans by Van Lanschot, a Dutch financial institution, to Promontoria, an investment vehicle managed by Cerberus.

Following the transaction, Promontoria notified borrowers under the loans that:

  • he had acquired the loans; and
  • the day-to-day loan service would in future be provided by a third party (Link Asset Services BV).

Recourse to a third party provider is a common method in the non-performing loan and securitization market and, under Dutch law, it also provides for compliance with an exception available under Dutch financial supervision, allowing to an acquirer of a loan portfolio to acquire the portfolio without having a consumer credit license in place.

Given the NPL nature of the portfolio, Promontoria proceeded with enforcement actions against certain borrowers in respect of the acquired loans, which gave rise to various legal proceedings initiated by the borrowers against Promontoria and / or Van Lanschot, s’ essentially opposing the transfer and assignment of individual loans and the subsequent actions of Promontoria.

It is important to note that the Van Lanschot portfolio was transferred to Promontoria using both:

  • a transfer of contract (i.e. a transfer of rights and obligations (contracts governing)); and
  • an assignment (i.e. a transfer of rights only (ceased)).

The transfer of contract was the subject of a separate legal proceeding, in which the lower courts held that, in view of the specific Van Lanschot terms and conditions applicable to the loans forming part of the proceeding, the borrower’s consent was required for contract transfer. Thus, without such consent having been obtained, the transaction between Van Lanschot and Promontoria could only be carried out through the use of the transfer option which was part of the deed of transfer and transfer used in the transaction.

Among the multiple court cases resulting from the Van Lanschot / Promontoria transaction, the recent judgment is the first in which the Supreme Court has rendered a decision. This is the result of the ability of Dutch lower courts to submit preliminary questions to the Dutch Supreme Court if it is required to adjudicate on multiple claims or cases in which similar facts / legal issues arise.

The responses provided by the Supreme Court relate only to the alienation of loan claims and the related duty of care of the acquirer. In view of previous rulings regarding transferability (see above) and their impact on the transaction, the Supreme Court’s decision on the transferability of the loan receivables was of paramount importance and was long overdue.

Executive summary and key takeaways

  1. Receivables under a loan agreement governed by Dutch law are inherently assignable and may be assigned by banks to non-banks. This applies regardless of whether the borrower is a consumer or not.
  2. The assignment of the receivable part of the loan does not entail the transfer of the credit relationship that exists between the originator / bank and a borrower. This relationship remains with the initiator / bank.
  3. Consequently, the principal / bank’s duty of care does not as such form part of the receivable which is the subject of the assignment. However, the non-bank / transfer duty of care is shaped by a combination of:
    • the legal framework on which the claim is based;
    • the defenses available to the borrower; and
    • the principle of reasonableness and fairness in Dutch law.

Assignment of loan receivables

In response to the first question referred to the Supreme Court, it confirms that claims under a loan agreement governed by Dutch law are by nature transferable.

Under Dutch law, the transfer and assignment of rights can be excluded by contract (eg in the applicable terms and conditions). If no contractual limitation applies, the starting point of the assignment is that the receivables can be assigned, unless the law or the nature of the receivables restricts the assignment.

The question decided by the Supreme Court arose from the fact that the borrower considered that the nature of a loan issued by a bank means that it is not transferable if it is intended to be transferred to an organization non-banking (such as Promontory). However, the Supreme Court has ruled that the essential aspect of a claim under a loan agreement is the borrower’s obligation to repay the loan (including accrued interest). This obligation is not affected by an assignment of the receivable to a non-banking organization and, therefore, receivables under loan agreements can be assigned by banks to non-banking organizations, whether or not the borrower is a consumer. The mere fact that the non-banker can effectively exercise the rights acquired by virtue of the assignment in a different manner does not affect the assignability of the loan claims as such.

Duty of care

The second question put to the Supreme Court concerns the duty of care applicable to the assignee / non-bank (in this case, Promontoria). Under Dutch law, Dutch banks are subject to a duty of care, which is based on their terms and conditions, their role in society, case law and the Dutch legal framework for financial supervision. In essence, the question was whether non-banks are also bound by a duty of care and, if so, how that duty of care differs from and relates to the duty of care applicable to Dutch banks.

The Supreme Court clarified that the essential characteristic of an assignment of loan receivables is the fact that the assignment relates only to the receivable part of the loan (that is to say the rights arising from the loan agreement). Therefore, the credit relationship between the bank and the borrower is not part of the assignment and therefore, in the event of an assignment of loan receivables (as opposed to a contract transfer), the underlying credit relationship remains. between the bank and the borrower.

Consequently, in principle, the obligations of a principal / bank under

  • the general conditions of this bank; and
  • the specific commitments that may apply due to the fact that the principal is a bank, such as investigation obligations and information commitments, are not part of the claim as such and will not apply therefore not to non-banking solely because of the task.

However, the Supreme Court also sets limits on the (relative) discretion that can be exercised by a non-bank in its behavior towards the borrower. These can be summarized as follows:

  • The loan receivable as such may be subject to certain legal limitations. For example, if the originator / bank and borrower have contractually agreed to a cap on the increase in margin (for example, the margin can be increased, but this increase must not exceed X% ), this limitation is part of the loan receivable and therefore also applies to the non-bank to which the loan is assigned.
  • Likewise, while a specific duty of care applies to the originator / bank which results in certain limitations, these limitations are part of the loan receivable and also apply to any non-bank to which the loan receivable. is ceded. An example given by the Supreme Court is a specific duty of care which obliges a principal / a bank to increase the margin only up to a certain maximum (for example a duty of care which could apply to banks under case law, which a margin of X percent is considered a breach of this duty of care).
  • In addition, according to the Dutch Civil Code, the assignment of a loan claim does not affect the defenses that a borrower could have asserted against the originator of the loan / the bank. For example, a borrower may invoke the right to suspend payments in response to the non-bank’s request for payment, if the borrower has been able to invoke this right to suspend against the originator / bank.
  • Finally, in addition to the limitations that attach to the loan to be received or apply as of right, the Supreme Court decides that following an assignment, the relationship between the non-bank and the borrower is governed by the generic principle of reasonableness and fairness in Dutch law. . For example, if the loan itself is not considered to limit the possibility of increasing the margin, the principle of reasonableness and fairness may nevertheless limit this possibility, for example in the case where the increase in the margin is excessive and / or not in accordance with market practice. .

Taking these factors into account, the Supreme Court confirms that if, in the event of an assignment of loan receivables, the originator / bank was contractually authorized to increase the margin but did not do so (e.g. for relationship purposes ), the non-bank can increase the margin if:

  • no specific duty of care limits the possibility of such an increase; and
  • the increase is not considered unreasonable or unfair.

This applies regardless of whether the underlying loan is non-performing or has been terminated, and whether the borrower is a consumer or not.

Dutch loan portfolio sales today

The Supreme Court ruling confirms that a Dutch law mission is available to financial institutions as one of the existing mechanisms to implement loan portfolio sale transactions and dispose of both performing and non-performing loans. This is important for the functioning of financial markets, also in the context of the proposed EU directive on non-performing loans.

To create transaction certainty, in current practice, parties often seek to implement a loan portfolio sale transaction through either contract transfer (provided the contractual framework applicable to the loans allows it. ) or a transfer of the relevant part of the seller’s business through a legal demerger (juridische afsplitsing) and the subsequent sale of the “Newco” business to the purchaser. Both options offer the seller a clean break in terms of contractual and non-contractual (duty of care) obligations. For a buyer, these options give him full control over the legal relationship with the borrower, while any known or unknown legal issues regarding the portfolio may be reflected in the purchase price and the purchase contract (for example, by through indemnities linked to borrowers’ due diligence requests).