Risk-free litigation against Funding-Loss?

In its recently-published decision of 29 January 2018, the Court of Appeal of Mons cut back a funding loss compensation of around 260,000.00 EUR to a mere fraction of that. After the decision of the Court of Cassation of 24 November 2016, this is yet another interesting ruling to the borrower´s advantage (see our earlier newsflash on this Cassation decision).

Facts. In January 2010, a company entered into a (mortgage) loan for more than 600,000.00 EUR spread over 25 years, but it subsequently decided that it wanted to reimburse this loan in February 2014. The bank responded with the calculation of the above-mentioned high funding loss compensation. The company challenged the amount of the compensation, referring to art. 1907bis of the Civil Code, which provides that the reinvestment fee [wederbelegingsvergoeding] in case of early repayment of an interest-bearing loan can amount to a maximum of the equivalent of six months’ worth of interest.

When an agreement could not be reached, the company summoned the bank. It asked the court (amongst other things) to rule that the reinvestment fee was indeed subject to art. 1907bis of the Civil Code. The company won both in the first instance and on appeal.

Receivability - risk-free litigation?

"Already-acquired and immediate interest"? It is striking that, throughout the proceeding, the loan simply continued to run and the company thus also had to continue paying it off.

The bank tried to draw an argument from this in order to have the claim declared to be irreceivable. According to the bank, the company had not yet decided whether it would actually reimburse the loan early or not. In Belgium, a claim that is filed solely in order to get a judge to adopt a position on what is a future and uncertain dispute is irreceivable in principle. This is the requirement of an "already-acquired and immediate interest" – something which therefore, according to the bank, was not present.

The Court did not follow this reasoning. It was, said the court, precisely because of the "exorbitantly" (sic) high amount of the funding loss compensation that the company had not yet repaid the loan. So a dispute really did exist already (meaning that the dispute was not a purely future one), which had led to the company still being unable to refinance its loan. It is most likely that release of the existing mortgage was precisely what was necessary for refinancing. The claim was therefore receivable.

Risk-free litigation? If the company could in fact still decide not to proceed with early repayment, conducting a legal proceeding entailed no risk for the company: if it won, it could refinance; if it lost, it could still choose to nevertheless not pay the loan back early.

However, relevant is the question of to what extent the above (circular?) reasoning of the Court would still hold up if the bank had been entitled to charge the high funding loss compensation. The question is also whether the company in that event would still actually have freedom of choice. Finally, it is also uncertain whether other courts of appeal and district courts would also rule that in these cases there is an already-acquired and immediate interest.

Even if the above questions should be answered positively, account would still have to be taken of the fact that every proceeding takes time. In this specific case the summons was served in September 2015. A judgement came in October 2016 and, as mentioned, the decision on appeal was issued in January 2018. Only then could the company actually refinance its loan.

No repayment of the interests during the proceeding. In this case the company was also claiming reimbursement of interest it had paid since its first demand, given that, absent the dispute, it would have refunded the loan at that moment. This claim was rejected by the court, because the company paid the interest in implementation of an agreement, whose validity was not disputed and of which it also did not demand the early dissolution.

The validity - interest-bearing loan?

Name or nature of the compensation. The judge then also had to rule on whether art. 1907bis of the Civil Code (CC) applied in this case, and thus whether the amount of the reinvestment fee indeed had to be limited to the equivalent of six months of interest. After the Cassation decision of 24 November 2016, only a single criterion is important for this, and that is whether or not the loan qualifies as an "interest-bearing loan". The name or nature of the compensation that the bank demands is thus not a criterion.

Earlier the banks tried to get around article 1907bis CC by e.g. not calling the compensation upon early repayment a "reinvestment fee" [wederbeleggingsvergoeding], which is the term the Civil Code uses, but for example a "funding loss compensation". The aforementioned Cassation decision provides on this that art. 1907bis CC applies to every compensation that is claimed as a result of an early repayment, regardless of what it was called.

Another mechanism was to simply exclude the possibility of early repayment in the agreement, but then to nevertheless allow it - subject to payment for a waiver of the bank´s right. The Court of Cassation shut that back door as well: any compensation demanded at that moment is also subject to art. 1907bis CC.

The issue of whether a bank can simply prohibit early repayment was not dealt with in the Cassation decision, nor was this addressed in the case under discussion here. After all, the bank involved here had expressly accepted the early repayment, albeit for an excessively high compensation.

Credit facility vs. interest-bearing loan. Another "back door" concerns the still relevant criterion, namely as to whether or not the loan qualifies as an "interest-bearing loan": the loan contract then mentions for example that it is a "credit facility" and thus not an interest-bearing loan. Art. 1907bis CC does not apply to a credit facility, after all . . .

In this case the agreement also stated that it was a credit facility. The judge can nevertheless requalify the agreement as an interest-bearing loan if he determines that the provisions and terms correspond to such qualification and not to the qualification as a credit facility. That is precisely what the (appeals) judge did in this case.

Freedom to assume the credit. The appeals judge notes that the very principle of a funding loss compensation runs counter to the nature of the credit facility: with a credit facility, the borrower pays a specific reservation fee because the bank must hold a defined amount available, and in exchange for this the borrower has the freedom to assume the credit or not, in whole or part, at any time during the agreed period. This freedom by no means exists if the borrower has to pay a very high compensation when he wants to pay it back. The existence of the obligation to pay a funding loss compensation thus per se already constitutes an argument for the requalification.

A part of this freedom to assume the credit or not is also the freedom to choose when the credit is assumed. In this case as well, the bank raised the argument that the assumption period was not a fixed moment: the company had precisely one month and three days to take out the amount (moreover, if it did not take out the amount, it also owed a compensation). The judge differentiated this criterion: the assumption period was so short that there is no freedom of assumption, such as is necessary in order to be able to speak of the existence of a “credit facility”.    

Conclusion

After the Cassation decision of 24 November 2016, this ruling once again creates a favourable precedent for the borrower. This might open up the gates (even further) for more such cases. After all, the potential (financial) impact is great for many companies. To be continued, undoubtedly.    

For more information on this subject you can contact Dave Mertens and Sophie Deckers (authors).