Legal expertise is required

Protect values, prevent damage: The EAA also needs a high degree of legal expertise to fulfil its mission. The EAA‘s legal department is called upon in relation to many issues, be it contractual law, concerning sales, bank products and capital market topics, or with regard to structured products, derivatives and financing. Specialist legal expertise is also necessary, as the EAA has taken on numerous legal disputes with the portfolio of the former WestLB. It stood as plaintiff or as defendant in existing legal proceedings and took legal steps itself to secure entitlements and dismiss spurious claims.

The EAA above all had to develop competence in the strategic management of large-scale litigation and mass lawsuits. The EAA‘s legal team actively managed external lawyers from 20 different commercial law firms at times. The most sophisticated proceedings were probably the active claims against investment banks in foreign jurisdictions. The EAA and ultimately the guarantors and counter-guarantors of the “Phoenix” portfolio – the State of North Rhine-Westphalia, the local Savings Banks and Giro Associations and the Regional Associations – are subject to a wide range of risks from investments of the former WestLB in structured capital market products. These are, in particular, US mortgages that were securitised and bundled in special purpose vehicles. With the help of its lawyers, the Phoenix special purpose vehicles succeeded in particular in asserting their legal rights against contractual parties in the US. As a result, more than USD 600 million has been pursued to date, which benefits the Phoenix guarantors. The EAA provided support to the Phoenix special purpose vehicles within the scope of its role as creditor. In Germany, the EAA is investing a similar amount of effort in managing the defence in cases of revocation of loan agreements and against interest rate swap claims by North Rhine-Westphalian municipalities.

Patience and detailed review of the individual case

The exposure

WestLB concluded interest rate swap agreements with municipalities before the financial crisis. These ranged from simple interest rate hedges to complex interest rate optimisation transactions.

The initial situation

As a consequence of the financial crisis, the advantages of swap transactions often failed to materialise. Some customers were threatened with encumbrancies. WestLB faced more than 30 proceedings with municipalities in North Rhine-Westphalia as early as 2012. These actions were also passed on when the former WestLB transferred its trading portfolio to the EAA, and more followed. The EAA was engaged in judicial and extra-judicial disputes with more than 60 municipalities at the peak. Interest swap judgements varied greatly throughout Germany in the courts of first instance and second appeal. Most of the municipalities enforced their claims before courts in North Rhine-Westphalia. The crux of the matter was the lack of information given to customers about the „initial negative market value“ of a swap. This term was defined by the Federal Court of Justice (Bundesgerichtshof, BGH) in 2011: accordingly, a bank violates its advisory obligations if it does not expressly inform customers about its gross margin. In the legal proceedings against the EAA, no distinction was generally drawn between the circumstances of the individual cases.

The strategy

The EAA concentrated initially on closely examining each individual case. It processed unresolved legal issues with external lawyers and continuously submitted its arguments to the courts. It invoked the BGH in eight cases. It used its analyses at the same time to offer appropriate settlements to municipalities. Moreover, these form the basis for creating appropriate risk provisioning for the proceedings.

The outcome so far

The BGH has made two rulings in EAA cases, one from April 2015 and one from March 2016. The previous instances are required to take into account the circumstances of each individual case and to accept evidence that was largely omitted previously. Even the first ruling of the BGH in one EAA case created scope for numerous settlement negotiations in 2015 and in the first quarter of 2016. The disputes with more than 20 municipalities were resolved. The settlement costs were largely covered by the EAA‘s risk provisioning.