The Federal Court of Justice (BGH) ruled on 22.07.2003 that the bank is obliged to reverse the transaction if an investor withdraws from a closed-end investment fund which was sold to him by the bank together with the financing.
In credit institutions, there is a model for maximizing revenue called “cross-selling.” The bank profits twice, once from a commission for the brokerage of the closed-end investment fund (this can be, for example, a real estate fund, but also a ship investment), and another time through the sale of a loan to the customer. The motto then vis-à-vis the customer is “You save taxes, profit through a return on investment, and require (almost) no equity capital”.
The bombshell then bursts when the distributions fail to materialise or are too low, and the investor realises that the additional payments to the bank are beginning to burden him: Gone is the dream of quick money – the tax savings were quite pleasant, but now the model should yield further money, of course more than interest and redemption require. If this does not happen, the investor is disappointed and feels the financial burden on the account as a so-called “current shortfall”.
This often leaves the investor poorer on a daily basis. The matter becomes particularly annoying when the bank demands a reinforcement of repayment and collateral. In the case decided by the BGH, the investor terminated his participation in the investment fund due to fraudulent misrepresentation and stopped the payment of interest and redemption to the credit institution. With that, the annoying payments to the bank were off the table for the time being. The bank sued, and lost before the BGH. D
he BGH accommodated the investor and ruled that the credit-financed entry into a closed-end real estate fund is a so-called “composite transaction”: This is what matters in order to obtain the possibility of reversal. The case is similar if an overpriced apartment was sold as a tax-saving model and the bank customer wants a reversal because the property is only worth a fraction of what it cost – and the rental income is correspondingly low, i.e. not enough to pay interest and repayments: Here, however, another senate of the BGH has ruled that the investor has to prove the “composite transaction”.
In the case decided here, the BGH allowed the investor to “return” the investment fund share to the bank, the value of which would then be credited against the loan, i.e. deducted from the loan debt. The Bank shall settle any difference remaining to the debit or credit of the investor. As far as a credit remains for the investor afterwards, he gets back even still paid rates for interest and redemption from his bank. After numerous closed investment funds offer sufficient reference points for a “notice because of bad-cunning deception”, investors are to be advised to separate fast from such unprofitable investments and to invest the money better. In any case, you can get rid of the burden permanently in the future, so you can get rid of an annoying bad investment.
Moreover, in individual cases, the initiator and/or the investment advisor are often liable for further damages that may remain with the investor.
Source: www.fiala.de RA Johannes Fiala (Munich), MBA (Univ. Wales – Financial Services), Bank-Kfm. Phone 089-17 90 90-0, Fax 089-17 90 90-79, eMail: info@fiala.de
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About the author
Dr. Johannes FialaPhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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