2013 Case of Note: Fifth Street Finance Corporation v David Dobbin
About MJM Limited
MJM is one of Bermuda’s leading law firms. We have a broad ranging practice with an emphasis on civil and commercial litigation, banking and finance, general corporate, trusts, insolvency, restructuring, insurance and reinsurance. We also offer advice and services to international individual and commercial private clients.
MJM Limited’s full profile on mjm.bm.
In this case, Fifth Street Finance v D Dobbin [2013] SC (Bda) 55 Com (313 KB PDF), Alan Dunch and Tim Frith of MJM acted on behalf of Fifth Street Finance Corporation in the recovery of $4,000,000 as money due under a Guarantee and Indemnity Agreement dated September 28th, 2009. The principal debtor whose debts were guaranteed by the Defendant was a Canadian company Repechage Investments Limited as assignee of pre-existing liabilities under a 2007 credit agreement owed by two of Repechage Investment Limited’s subsidiaries, Elephant & Castle Group Inc. (a Canadian corporation) and Elephant & Castle Inc. (a Texas corporation). The Elephant & Castle Group operated and franchised British style pub restaurants in the United States and Canada, however the group collapsed in 2011 and Repechage filed a voluntary bankruptcy petition in the United States Bankruptcy Court for the District of Massachusetts.
The Defendant alleged that the Guarantee formed part of wider financing arrangements involving GE Canada Equipment Finance LP (“GE”) a co-creditor of Repechage together with the Plaintiff. Under an Agreement dated October 16th, 2009 GE and Fifth Street Finance agreed to co-operate and share the liquidation assets of Repechage. On or about February 3rd, 2012 an asset sale took place by order of the United States Bankruptcy Court under which most of the group’s assets were sold pursuant to a “carve out” whereby junior third party claims were paid ahead of GE’s senior debt with the result that the Repechage assets available to secure the principal debts were significantly reduced. Significantly, the Defendant failed to object to “the carve out” at the time.
This did not seem to prevent the Defendant from arguing in the proceedings in Bermuda that the Plaintiff had failed to take any or any reasonable care in relation to the principal debts and had materially changed or acquiesced in the change of the risks undertaken by the Defendant in the Guarantee. The Defendant further argued that as a matter of Ontario law the Plaintiff thereby lost the right to demand under the Guarantee and/or its right to claim were reduced by the amounts by which the Plaintiff’s conduct had prejudiced the Defendant as surety.
The Plaintiff denied that Ontario law and Canadian federal law had the effect alleged in the Defence and the matter came on for trial of the preliminary issue of Canadian law. The question ordered to be tried as a preliminary issue was “whether the Plaintiff’s demand by letter dated 6th January, 2012 in the sum of US $3,941,100.72 was lawful as a matter of Canadian law”. Following the consideration of expert evidence on both sides and a hearing over two days the Chief Justice found that the demand was lawful and gave judgment for the Plaintiff.