The Banking Litigation Law Review: Germany
The year 2020 was, and still is, the year of the covid-19 pandemic. Curfews and other lockdown measures have reached the courtrooms. Hearings have been delayed or completely cancelled, and digitisation received a boost.
Most civil law cases in 2020, however, have had nothing to do with the pandemic. After a decade of low interest rates, a significant number of disputes decided by the Federal High Court (BGH) concerned the rescission of consumer loans after borrowers had revoked the underlying loan agreements, in order to benefit from lower interest rates.
Nevertheless, the turmoil caused by the pandemic will most likely hit the financial industry, even if it is with some delay. In addition to the immediate impacts of the recession, such as increasing insolvencies, it is likely that interest rates will remain at a low, or even negative, level, one that has remained the same since the financial crisis. The financial industry in Germany will therefore continue to struggle with the same problems that have been witnessed in the last 10 years, yet presently in an even more challenging environment.
In 2019 and 2020, the trend towards increased collective redress continued unabated.
Significant recent cases
i Unwinding of consumer loans – dispute between the Federal German High Court and the European Court of Justice
In recent years, a number of cases dealing with revocation and unwinding of consumer loan agreements have preoccupied the courts. These lawsuits were based on the non-compliance of revocation instructions issued by the banks with consumer protection laws. If the instruction was flawed, the borrower was entitled to unwind the consumer loan for an unlimited period, even after the loan itself was already repaid.2 Once the loan agreement was revoked, all payments (including interest payments) had to be unwound and the borrower only had to pay a loss-of-use indemnification. The economic rationale was the policy of low interest rates inducing consumers to unwind existing high interest rate loan agreements and secure lower market rates instead. Thus, these claims retroactively subverted the banks' interest calculation.
The first cases date back as early as the beginning of the 1990s.3 In 2019 and 2020, these cases still constitute more than 60 per cent of all cases decided by the banking senate of the BGH.
In July 2010, in order to facilitate the banks' attempts to comply with the law, the German lawmaker issued a pre-formulated model instruction,4 which was used by a number of banks. Subsequently, courts of lower instance expressed doubts as to whether the model instruction complied with the EU consumer credit directive. The argument was that the instruction was unclear because it included a cross reference to the German Civil Code regarding the necessary information, instead of expressively listing such information. However, the BGH decided in 2012 that the cross-reference was sufficiently clear and perspicuous for the consumer.5
In March 2020, upon a request for a preliminary ruling under Article 267 TFEU submitted by the Regional Court of Saarbrücken, Germany, the European Court of Justice disagreed with the finding of the BGH. The ECJ held that the consumer credit directive requires that loan agreements specify the information and that a mere reference to provisions of national law (known as 'cascading reference') is not sufficient.6
In numerous decisions, however, the BGH refused to follow the ECJ. The BGH argued that the ECJ did not have the jurisdiction to answer the questions in dispute because the consumer credit directive did not apply to credit agreements secured by mortgages. Therefore, the case had to be decided on the merits solely in accordance with German law, which was clear and unambiguous that a bank making use of a model instruction pre-formulated by the lawmaker could rely on its legality (known as 'fiction of legality').7 Because there is no direct appeal to the ECJ, the BGH will likely have the last word.
There are also a number of cases where the BGH held that the consumers forfeited their right of withdrawal. This applied in particular in cases where the revocation was declared after the loan had already been repaid and the bank had released the security to the borrower.8
In summary, the BGH has applied an increasingly restrictive approach regarding the unwinding of consumer loans.
ii Arrangement fees and charges
In 2020, the BGH maintained its restrictive approach against standard fees charged by the banks, in particular with respect to the arrangement fees usually charged in the context of loan agreements. Already in 2014, the BGH had decided that such fees provided for in consumer loan agreements are invalid, if the fee arrangement constitutes a pre-formulated standard term of business as opposed to being individually negotiated.9 According to the law on standard business terms, courts may scrutinise the content of pre-formulated standard business terms and declare such terms to be invalid, if they find that the party imposing the terms unreasonably disadvantages the other party by unilaterally deviating from what is provided for in the relevant code. In 2017, the Court applied the same view to B2B-cases.10
Following these decisions, the Court clarified a number of follow-up questions. Inter alia, it decided that the mere denomination of the fee, as well as a standard clause containing the borrower's confirmation that the fee had been individually negotiated, is irrelevant for the classification of the clause. The court held that such confirmation also violates the law on standard business terms, which prohibits factual confirmations and shifting the burden of evidence to the customer in standard terms. Rather, the bank would have to provide evidence that the clause was actually negotiated individually. This would require the customer to have an actual alternative for conditions without a fee.11 Furthermore, the court held that the fact that other clauses in the respective loan agreement had been individually negotiated was irrelevant. Rather, the bank would have to provide evidence that the fee clause in dispute was the result of the negotiation.12
Banks' attempts to circumvent the economic effects of these decisions range from concluding separate fee agreements governed by another choice of law or waiver agreements where the borrower waives the right to claim repayment of the fee. However, the banks' attempts seemingly have not been scrutinised by the courts yet. As a result, a significant risk remains that any kind of fee arrangements in the context of loan agreements are invalid.
iii Cum-Ex Transactions
German authorities are continuing their efforts investigating and prosecuting cum-ex transactions. The relevant transactions had been carried out between 2005 and 2011 in Germany as well as other European countries and had essentially led to fiscal authorities repaying or setting-off capital yield tax multiple times despite the tax had only been paid once. According to estimates, German prosecutors now pursue 600–750 suspects. Multiple banks are expected to be ordered to hand over profits they made from participating in cum-ex transactions in one way or another.
The first criminal trial against two former London bankers ended on 18 March 2020. The Bonn district court found the men guilty of tax evasion and aiding and abetting tax evasion respectively.13 As both of them had been highly co-operating, they received relatively mild suspended jail sentences. The court also ordered one of them to pay back €14 million he had made from the trades. In addition, courts will decide on the criminal liability of tax consultants who provided expert opinions attesting that the transactions complied with German tax law at the time. Moreover, the court ordered a private bank to repay its profit plus interest to the German tax authorities. Four other financial service providers, which had been initially included in the trial, had been later excluded, in order to expedite the proceedings due to the covid-19 outbreak. Owing to an appeal against the verdict, the German Federal Supreme Court will give the final ruling on the matter. More proceedings against the excluded parties and other players are expected to come.
German fiscal authorities also seem to be focusing on custodian banks involved in cum-ex transactions and holding them liable for not complying with their obligations provided for in the German Income Tax Code. At this stage, it is unclear whether custodian banks were actually and actively involved in cum-ex transactions or whether they only fulfilled their statutory obligations without knowing that they played a part in the tax scheme of other players.
The Frankfurt Higher Regional Court overturned a first instance judgment awarding a €22.9 million damage claim to German bank Helaba.14 The court rejected Helaba's argument that defendant Société Général had a secondary obligation under a sales contract to provide buyer Helaba with the possibility to set-off taxes in the amount of the difference between the net and gross dividend. According to the court, the statutory obligation of the custodian bank of the buyer to withhold and pay capital yield tax is not a contractual obligation vis-à-vis the buyer of the stocks. The coincidence of the seller and the custodian bank on the sell-side being the same legal person does not justify an extension of the seller's obligations vis-à-vis the buyer. The Frankfurt Higher Regional Court allowed a further appeal to the German Federal Supreme Court.
Finally, the Cologne Fiscal Court decided that a buyer purchasing shares over the dividend record date OTC from a short seller does not become the beneficial owner of the shares at the time the parties concluded the sales contract.15 Thus, the buyer does not have a right to set-off capital yield tax, which has been withheld and paid with regard to the dividend. The tax set-off mechanism provided for in the German Income Tax Act does not allow a multiple reimbursement of capital yield tax that had only been withheld and paid once. The Cologne Fiscal Court allowed the appeal to the German Federal Tax Court. Generally, the tax proceeding before the Cologne Fiscal Court is considered as a model proceeding for multiple other similar cases pending before the Federal Tax Office.
Recent legislative developments
i Introduction of a European Prosecution Authority
In the near future, an independent, decentralised authority will prosecute crimes against the EU's financial interests. In June 2017, 20 EU member states had already agreed on the establishment of the new authority.16 The newly appointed European Public Prosecutor, who will focus on corruption, fraud and money laundering issues, will assume office at the end of 2020. The German Federal Parliament approved the law on 28 May 2020.
ii Insolvency law
As of 1 July 2020, the German Federal Government decided that, in the future, overly indebted companies and consumers will be able to exit bankruptcy after a maximum of three years.17 The new regulation is part of the Federal Government's economic and crisis management pact. In light of the economic consequences of the covid-19 pandemic, honest debtors shall be given the opportunity to make a fresh start. The new regulation also implements the requirements of the EU directive on restructuring and insolvency in the area of debt relief. The instrument of debt relief allows debtors, subject to certain conditions, to discharge unpaid debts to their creditors. Previously, the period used to be six years. The shortened three-year procedure will apply to all procedures commenced on or after 1 October 2020. The regulation will apply to consumers until 30 June 2025 and will then be reviewed.
iii Amendment to the Foreign Trade and Payments Act
On 18 June 2020, the German Federal Parliament amended the Foreign Trade and Payments Act in order to prevent information leaks or technology transfer that can have serious consequences for public order and security in Germany.18 The amendment essentially implements the EU screening regulation that came into force in 2019. The new rules will apply to the acquisition of companies or shares by investors from outside the EU.
The amendment tightens the examination of foreign investments. Specifically, the test criterion of an 'expected impairment' of public order or security will apply to future foreign investments. Furthermore, any notifiable acquisition will be 'pending ineffective' as long as the investment review is ongoing.
Changes to court procedure
In recent years, the German legislator added some elements of collective redress to the civil procedure, which traditionally had been strictly bipartisan. In 2005, the legislator adopted the Act on Model Case Proceedings in Disputes under Capital Markets Law aiming at providing declaratory relief to a specific number of claimants regarding preliminary questions in capital markets disputes. In 2018, the Act on Model Declaratory Actions came into effect, which allows consumer protection agencies to initiate model proceedings against private companies, in order to determine certain preliminary questions with binding effect for the claims consumers may have against the company. Both instruments are limited, either with respect to the parties who may use the instrument or with respect to the matter in dispute. Both of them have in common the fact that they only allow the determination of preliminary questions, that determination being the basis only for each subsequent individual claim; in other words, each claimant still has to establish the individual prerequisites of its own claim (e.g., amount of damages and causation).
The legal industry is still in the process of gaining experience with these actions. One of the first model proceedings concerned Diesel-Gate and was initiated against Volkswagen and was terminated by an out-of-court settlement agreement. Another model proceeding was brought by a consumer organisation against the savings bank of Leipzig. The consumer organisation accused the bank of paying too low interest rates and sought declaratory relief on whether contractual interest rate fixing clauses were invalid. The Dresden Higher Regional Court granted the declaratory relief; an appeal is currently pending with the BGH.19
Given the limitations of the aforementioned instruments, it is noteworthy that a new instrument for class action will be introduced within the next two years. Already in 2018, the European Commission proposed a new directive on representative actions for the protection of collective interests of consumers.20 A political agreement was reached in June 2020 but still needs to be ratified by the European Parliament and the European Council. Once the directive is in effect, Member States will have two years to implement it in their national laws. The new instrument will allow consumer protection agencies to file cross-border claims directly for payment of damages.
In addition, the BGH opened the door for registered debt collection agencies to enforce uniform claims assigned to them on a trust basis. Previously, such fiduciary assignments were often held to be invalid due to a breach of the Legal Services Act; this is because the main subject of the agencies' activities was considered as rendering legal advice, which was reserved for attorneys-at-law.21 The BGH now favoured a more liberal approach towards debt collection, allowing all measures in connection with the collection and enforcement of the claim. This includes claims being initiated in the name of the collection agency.22
The aforementioned decision concerned a claim for repayment due to excessive rent payments under the Rent Limitation Act of the City of Berlin. However, it is also groundbreaking for numerous companies in the digital industry, offering online services for assessing and collecting any kind of uniform claims, including claims against the financial industry. Though the decision does technically not concern a class action, it paves the way for enforcing small uniform consumer claims in a more or less automated way. Thus, it leads in the same direction as class actions.
Privilege and professional secrecy
Under the German code of civil procedure, there is no general pre-trial discovery or disclosure obligation. Each party of a proceeding has to submit the facts and documents supporting their claim. Only under restricted circumstances, a court may direct one of the parties or a third party to produce documents, records or any other material in their possession, namely that (1) one of the parties made specific reference to the details of such documents in the course of the proceedings and its relevance for the case; and (2) the applicant sets forth the reasons why the party itself cannot produce the document but believes that the other party has the document in their possession. In general, the third party could also be an attorney. However, an attorney must not be directed to produce documents, if he or she is entitled to refuse to testify (which is usually the case).
Because of these restricted rules, document production is scarcely used in civil proceedings, the question of privilege and professional secrecy is rarely raised and, therefore, often is of no importance in civil proceedings. The BGH recently upheld the very restricted approach to pre-trial discovery and document production: The case concerned a consumer loan agreement in which the borrower had exercised its right of withdrawal. Although the law generally provides that, in case of revocation, the contractual performances received by each party as well as the emoluments taken are to be returned, the court rejected a claim by the borrower for disclosure of the bank's specific emoluments taken from the loan amount in dispute. The court argued that there is no specific obligation by the bank to disclose its business secrets, because the consumer could rely on the general assumption that the bank had taken emoluments in the amount of the statutory interest rate.27
However, there might be an exception to the application of privilege and professional secrecy rules in case a civil claim may also be based on criminal offences. In general, attorneys are bound to secrecy and a breach of such duty may constitute a criminal offence. In order to enforce and protect such duty to secrecy, attorneys also have the right (and obligation) to refuse testimony on matters covered by their duty to secrecy in both civil and criminal proceedings. Despite this duty to secrecy, criminal investigators have recently confiscated documents and reports held by external lawyers in a number of high-profile cases. For example, Jones Day has been raided in relation to the VW emission scandal and Freshfields has been raided in relation to the near bankruptcy of (former) HSH Nordbank AG. In these cases, the external law firms had been hired to conduct internal investigations and have submitted internal investigation reports to their clients. Generally, the criminal procedure code provides that in cases where criminal charges have been brought against a defendant, certain documents – including documents in the possession of an attorney as well as all documents relating to attorney-client communications – are exempted from confiscation by the investigating authorities. However, in the aforementioned cases, the investigators argued that there is no general prohibition to seize such reports and any related documents, but rather the question of seizure would depend on the individual content of the documents. In particular, the interviews of employees would not be subject to the legally protected 'bond of trust' between the attorney and the client. Lower courts upheld these decisions.28 Unfortunately, the question has not yet been scrutinised by higher courts and thus remains unclear. Though Jones Day filed a constitutional complaint, the constitutional court refused to decide on the merits, arguing that Jones Day – as a US-based law firm – could not claim a violation of the basic rights under the German constitution.29
Once the investigation authorities have seized documents, any person having a legitimate interest may demand access to the records and could then also make use of them in civil proceedings. This is also a frequent strategy of claimants in banking litigation cases.
Sources of litigation
Typical scenarios in banking disputes concern mis-selling cases and prospectus liability when the customer relied on incorrect information or flawed advice, or both, by the bank. German law provides for an informed investor concept: the mere commencement of a conversation between a bank and its customer concerning an envisaged investment by the customer and his or her request for a recommendation by the bank constitutes an implied advisory agreement.30 Under this contract, the advice rendered by the bank has to be investment and investor-friendly; that is, the bank has to inquire about the customer's experience and knowledge as well as his or her risk awareness and personal financial circumstances, including the income and wealth position and the purpose and duration of the envisaged investment. Further, the bank has to evaluate all publicly available information with regard to the recommended investment and must inform the customer about the main risks. A negligent false statement is considered a breach of contract, resulting in a damage claim for unwinding the sale. In this regard, the courts argue that there is an actual presumption that the customer would have refrained from making the investment if properly advised. Similarly, prospectus liability requires a prospectus to disclose all risks and circumstances relevant for the investment decision fully, completely and correctly.
As mentioned above, a significant number of cases in recent years concerned disputes for revocation and unwinding of consumer loan agreements.31 It appears that further cases are still pending in lower courts. As the dispute between the BGH and the ECJ described above shows, the BGH is currently trying to suppress these lawsuits and mostly rejects new claims, either by arguing that the banks could rely on the model instruction pre-formulated by the legislator,32 or that the consumer's right of withdrawal was forfeited.33 It remains to be seen whether this line of decisions will finally stop the wave of lawsuits.
Given the current economic environment, a number of cases concerning fee and interest issues are pending. The questions in dispute are whether fees requested by the banks are invalid due to a breach of the law on standard business terms34 or how long, if any, banks are bound to long-term high-yield interest rates.
1 Marcus van Bevern is a partner at Kantenwein. The author would like to thank associate Lisa Maria Oettig for her support in the preparation of this chapter.
2 BGH, judgment of 12 July 2016, court reference: XI ZR 564/15.
3 BGH, judgment of 8 July 1993, court reference; I ZR 202/91.
4 Art. 247 section 6 annex 6 Introductory Code to the German Civil Code.
5 BGH, judgment of 15 August 2012, court reference: VIII ZR 378/11; confirmed by judgment of 22 November 2016, court reference: XI ZR 343/15.
6 CJEU, judgment of 26 March 2020, court reference: C-66/19.
7 BGH, resolution of 19 March 2019, court reference: XI ZR 44/18; resolutions of 31 March 2020, court references: XI ZR 198/19, XI ZR 299/19 and XI ZR 581/18; resolutions of 26 May 2020, court references XI ZR 103/19, XI ZR 117/19, XI ZR 213/19, XI ZR 252/19, XI ZR 261/19, XI ZR 262/19, XI ZR346/19, XI ZR 359/19, XI ZR 372/19, XI ZR 413/19, XI ZR 424/19, XI ZR 428/19, XI ZR 434/19, XI ZR 444/19, XI ZR 458/19, XI ZR 514/19, XI ZR 541/19, XI ZR 569/19, XI ZR 570/19, XI ZR 64/19, XI ZR 65/19 and XI ZR 98/19.
8 BGH, judgment of 21 January 2020, court reference: XI ZR 465/18; resolution of 23 January 2018, court reference: XI ZR 298/17; resolution of 3 December 2019, court reference: XI ZR 100/19.
9 BGH, judgment of 13 May 2014, court reference: XI ZR 405/12.
10 BGH, judgment of 4 July 2017, court reference: XI ZR 562/15.
11 BGH, judgment of 19 February 2019, court reference: XI ZR 562/17.
12 BGH, resolution of 19 March 2019, court reference: XI ZR 9/18.
13 LG Bonn, judgment dated 18 March 2020, court reference: 213 Js 41/10 – 1/19.
14 OLG Frankfurt, judgment dated 2 July 2020, court reference: 1 U 111/18.
15 FG Köln, judgment dated 19 July 2019, court reference: 2 K 2672/17.
16 See Council Regulation (EU) 2017/1939 of 12 October 2017.
18 See http://www.bundesregierung.de/breg-de/suche/aussenwirtschaftsgesetz-1739866; http://www.bmwi.de/Redaktion/DE/Pressemitteilungen/2020/20200408-altmaier-investitionen-in-sicherheitssensiblen-bereichen-
19 OLG Dresden, judgment of 22 April 2020, court reference: 5 MK 1/19.
21 BGH, judgment of 30 October, court reference: XI ZR 324/11; judgment of 11 December 2013, court reference: IV ZR 46/13; judgment of 21 October 014, court reference: VI ZR 507/13; judgment of 11 January 2017, court reference: IV ZR 340/13; judgment of 21 March 2018, court reference: VIII ZR 17/17.
22 BGH, judgment of 27 November 2019, court reference: VIII ZR 285/18.
23 OLG Stuttgart, judgment of 20 January 2015, court reference: 10 U 102/14; Vollkommer in: Zöller Commentary on the Civil Procedure Code, 33rd edition 202018, Section 940, margin No. 8.4.
24 BGH, judgment of 10 October 2000, court reference: XI ZR 344/99.
25 OLG Frankfurt, judgment of 3 March 1983, court reference: 10 U 244/82.
26 OLG Stuttgart, judgment dated 14 November 2012, court reference: 9 U 134/12; Vollkommer in: Zöller, Commentary on the Civil Procedure Code, 33rd edition 2020, Section 940, margin No. 8.4.
27 BGH, judgment of 17 April 2018, court reference: XI ZR 446/16.
28 LG Hamburg, resolution of 15 October 2010, court reference: 608 Qs 18/10.
29 BVerfG, resolution dated 27 June 2018, court reference: 1287/17, 2 BvR 1583/17.
30 BGH, judgment dated 6 July 1993, court reference: XI ZR 12/93.
31 Cf. Section II.1.
32 See footnote 8.
33 BGH, judgment of 21 January 2020, court reference: XI ZR 465/18; resolution of 23 January 2018, court reference: XI ZR 298/17; resolution of 3 December 2019, court reference: XI ZR 100/19.
34 See above Section II.2.
35 BGH, judgment dated 29 April 2014, court reference: II ZR 395/12.
36 BGH, judgment dated 29 April 2014, court reference: II ZR 395/12.
37 Section 823 par. 2 German Civil Code.
38 BGH, judgment dated 7 July 2015, court reference VI ZR 372/14; judgment dated 13 December 2011, court reference: XI ZR 51/10; Wagner in Munich Commentary on the German Civil Code, 7th edition 2017, margin No. 505 et seq.
40 Section 136 German Civil Code.