(CN) --- Europe's highest court on Thursday said a bank created in 2014 to save Banco Espirito Santo, at the time Portugal's second-largest bank, from collapse cannot be shielded from a lawsuit brought against Banco Espirito Santo by a woman who claimed she was given bad financial advice.
The European Court of Justice ruled a woman's case against Novo Banco, a so-called “bridge bank” formed to save Banco Espirito Santo, should be allowed to proceed. Novo Banco and the Portuguese government claimed the new bank was not liable for financial advice the woman received from Banco Espirito Santo, or BES as it is commonly known.
In 2008, the woman, who is referred to in court documents only by the initials VR, bought about 160,000 euros ($201,000) worth of shares in Kaupthing Bank, a major Icelandic bank that would later that year collapse during the financial crisis that caused the Great Recession. The woman bought the shares through the BES's Spanish branch in Bilbao.
In 2014, the BES too was on the brink of collapse after it lost about 3.6 billion euros ($4.3 billion) after months of turbulence as allegations emerged of fraudulent activities by the bank's officials. The bank was run by the Espirito Santo family, long a major force in Portugal's economy.
In Augut 2014, the Portuguese central bank, the Banco de Portugal, came up with a 4.9 billion euro ($5.9 billion) rescue plan that split the bank in two. The BES' healthy assets were transferred to the Novo Banco while its toxic assets remained with BES. The BES Spain branch became part of Novo Banco.
VR sued Novo Banco Spain in February 2015, claiming she should not have been advised to buy shares in Kaupthing Bank. She demanded to be repaid the $201,000 she'd spent on the transaction. In 2008, when she bought the shares, she was 68 years old and had no financial knowledge, court documents said. She alleged she was not told about the risks she faced in buying the bank shares.
Novo Banco rebutted her claims and argued that it was not liable for BES's actions.
In October 2015, a Spanish court of first instance in Vitoria backed VR's claims and ruled that Novo Banco could be held liable and that it should repay the woman. In the meantime, Portugal's central bank sided with Novo Banco and declared that the bridge bank was not liable for the contract BES and VR had entered into.
On appeal to Spain's high court, Novo Banco pointed to the central bank's rulings and said VR's lawsuit should be dismissed. Spain's Supreme Court then referred the matter to European Court of Justice in Luxembourg.
In its ruling, the Court of Justice said the bank reorganization cannot disallow VR from pursuing legal proceedings against the bridge bank and that barring her from doing so amounts to “a limitation on the right to an effective remedy.”
Courthouse News reporter Cain Burdeau is based in the European Union.
Follow @cainburdeau
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