Leveraged Equities may not be the owner of Macquarie margin loans

Bendigo and Adelaide Bank have plenty of negotiations to sort out with Macquarie Group in the wake of a surprising ruling of the Federal Court in Sydney on Friday over a contested margin call by an aggrieved barrister.

There will no doubt be an appeal by the two banks, but for now there's a court ruling that, in effect, Macquarie failed to sell the $1.5 billion in loans within its margin lending business to Bendigo in January 2009 and so the latter, through its subsidiary Leveraged Equities, does not own them.

Bendigo and Adelaide Bank is choosing to describe the ruling as "particular" to the case brought by the applicant, Ross Goodridge.

However, apart from the ins and outs of the actual margin call imposed on him in February 2009 that gave rise to the case (over a highly leveraged position over units in a distinctly out of favour Macquarie CountryWide Trust), the core of the ruling by the judge, Steven Rares, provides the basis for numerous challenges by unhappy clients.

The thrust of the analysis by the judge is that Macquarie failed to "novate", or replace, its contractual relationship between itself and Goodridge with BNY Trust Company. (BNY owned the margin lending business for one day in January 2009 before transferring it to Leveraged Equities.)

An appeal court comprising judges sympathetic to the day-to-day realities of commerce may end up forming a different view, but the conclusion of Rares is that Macquarie was obliged to seek consent from Goodridge and that Goodridge did not provide it (notwithstanding contractual terms that appear to suggest the bank had that consent from their client from the day he became a margin lending customer in 2003).

On this vital detail it is not apparent there is anything particular to the Goodridge case. Rather, this fault is likely to apply to most, and probably all, of the margin lending business purchased by Leveraged Equities.

The only issue particular to the Goodridge case is the evidence of operational weaknesses within Leveraged Equities in February 2009 (and a period of unusually intensive activity given the fragile state of financial markets). The judge also found that Goodridge had fulfilled his requirements to meet the bank's margin call and that the fact that the bank ended up with a few thousand dollars less than they wanted was the bank's fault.

The judge found that Macquarie Bank and Leveraged Equities did not hold the power to sell his units in Macquarie CountryWide and that Goodridge is entitled to have his property restored to him and to be compensated for any loss suffered.

Neither Macquarie nor Bendigo and Adelaide Bank yesterday were willing to discuss the case, including any warranties or indemnities that the former may have provided the latter.

Bendigo and Adelaide Bank reports its interim profit this morning.