The European Securitization Forum (ESF) and the Securities and Financial Markets Association (SIFMA) hosted a seminar last week investigating the explosion in U.S. subprime litigation and what implication it had for European market participants.

While it's clear that Europe has not seen nearly as many claims filed, lawyers warned that the courts could begin to see more action as the credit crunch wears on.

There is little evidence in the U.K. of substantive interbank disputes or investor complaints other than the notion that there are bound to be some and lawyers said that institutions are well advised to shore up some funds for potential claims.

"The U.K. has not seen an explosion of subprime litigation, but there is an increasing awareness of the need to prepare for relative disputes, to identify areas that might generate controversy and to ensure litigation readiness in clients," said Richard Harrison, a partner at Laytons Solicitors.

In the U.S., the disputes continue to gather pace and a team of lawyers from Patton Boggs highlighted that there is potential for litigation from every angle of a transaction structure. "Don't sit on the sidelines hoping it will work out, it probably won't, so you should be doing something now," said Talcott Franklin, a partner at the firm.

Harrison said that the English courts will probably reach the same results as the U.S. - they will construe contractual and fiduciary obligations in a similar fashion, looking in detail at the factual background and the structure and content of the formal contractual relationships, although there will be differences in culture and approach.

"We are united by a common culture but divided by detail," Harrison said. "The explosion will be less felt because differences in the underlying litigation culture are significant."

The U.K. courts, for instance, prefer privacy and discretion as opposed to the more public court room litigation culture in the U.S. Harrison said that he expected disputes between banks and financial institutions to take place in an atmosphere of controlled aggression and icy politeness and individual and specific issues entail detailed confidentiality clauses when settled.

Public litigation, Harrison said, would be the last resort and although he expects an increase in group litigation as well as the use of publicity, the environment would not be the same as the U.S.

The U.K. courts also drive litigation away from the courts by encouraging alternative resolution and mediation. The courts encourage parties to limit the matters in dispute between them and then engage in mediation with a view to resolving the dispute out of court.

Orion Tried in U.K.

Last week, the chancery division of the High Court of Justice ruled on a case between the security trustee and creditors of the Orion SIV. Orion's security agreement is governed by New York law but the trustee Bank of New York chose to file its claim in the U.K.

The senior subordinated note holders were represented by lawyers from Sidley Austin, London and lawyers from its affiliated partnerships in the U.S. The Court considered a variety of factors including the fiduciary duty of a security trustee in these circumstances under New York law in its decision. It concluded that the security trustee of the defaulting SIV did not have to, and should not take direction from the Orion senior noteholders to sell the SIV's assets in a distressed market. Subordinated creditors argued that the trustee should have waited for the market to improve to maximize returns.

Sidley solicitors said that the decision adds clarity to the rights of different classes of secured creditors in the context of distressed SIVs.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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