The defendant Metcalfe & Mansfield was the trustee of Devonshire Trust, an asset-backed commercial paper (“ABCP”) conduit that had issued $660 million in notes. Barclays acted as liquidity provider to Devonshire and as asset provider in respect of two leveraged credit default swaps.
In mid-August 2007, the Canadian market for third-party sponsored ABCP froze. A number of conduits were unable to issue new notes to repay maturing notes. Conduits, including Devonshire, called on liquidity providers to fund liquidity. Barclays did not provide liquidity, citing the non-existence of a “Market Disruption Event.”
On August 16, 2007, conduit operators, liquidity providers, asset providers (including Barclays) and investors entered into a standstill agreement (the “Montreal Accord”) to allow for restructuring negotiations to take place. From December 2007 on, the Devonshire restructuring negotiations occurred outside of the broader Montreal Accord.
On January 13, 2009, the same day the Montreal Accord restructuring was being finalized, Barclays purported to conditionally pay Devonshire's liquidity demands and terminate the swaps. Barclays sued Devon-shire alleging that it was insolvent and therefore subject to an “Event of Default.” Barclays claimed a loss of $1.2 billion and priority over $600 million in collateral held by the defendant Bank of New York (“BNY”). Devonshire issued a notice of termination on the same date and counter-claimed that noteholders were entitled to be repaid ahead of Barclays.
On consent, the trial was bifurcated. The first trial began in September 2010 before Justice Newbould, concluding in June 2011. For the purpose of this trial, it was assumed, among other things, that Devonshire's liquidity demands were valid.
In the trial judgment, Justice Newbould agreed with Barclays that Devonshire was insolvent. But, he held that Barclays was subject to an Event of Default because it had failed to pay Devonshire's liquidity demands. Barclays had a 3-day cure period to remedy its failure to pay, which Newbould J. found was extended by regular standstill extension agreements. Newbould J. found that Barclays had fraudulently misrepresented the state of its negotiations with noteholders in emails to Devonshire requesting a continuation of this standstill in the two business days prior to the termination date. Newbould J. granted rescission of two final extensions, entitling Devonshire to terminate the swaps.
Further, Newbould J. also determined that Barclays' termination of the transactions was ineffective because the manner in which it did so breached its duty of good faith to Devonshire.
Newbould J. also agreed with Devonshire that its noteholders have priority to any payment ahead of Barclays.
As an alternative finding, Newbould J. assessed Barclays' loss. Barclays claimed that its loss was some $1.2 billion. Newbould J. rejected the valuation approach of Barclays' expert witness and accepted, in part, the approach of Devonshire's expert witness. He held that Barclays' loss was $12,000 and reduced this loss to nil due to mitigation.
Barclays' appealed and in a unanimous decision, Goudge, Sharpe and Simmons JJ.A. dismissed Barclays' appeal, but varied the assessment of Barclays' loss.
The Court of Appeal upheld Newbould J.'s finding that Barclays had misrepresented the status of negotiations to Devonshire in January 2009, entitling Devonshire to a rescission of the final two extensions.
The Court of Appeal also upheld the finding of the trial judge that Barclays had breached its duty of good faith to Devonshire through the manner in which it terminated the swaps.
The Court of Appeal varied Justice Newbould's calculation of Barclays' loss to $264 million, subject to reduction for mitigation.
On appeal, Barclays was represented by Peter Howard, Eliot Kolers, and James Wilson of Stikeman Elliott LLP and assisted by William Scott of Stikemans. Trial counsel included Samaneh Hosseini, as well as Lindsay Love-Forester (the latter now of Lerners LLP).
Devonshire was represented by J. Thomas Curry, Monique Jilesen, Brendan Gray, and Brian Kolenda of Lenczner Slaght Royce Smith Griffin LLP and was assisted by Scott Rollwagen, then of Fasken Martineau DuMoulin LLP and now of Lenczner Slaght, and David Lemieux of Norton Rose Fulbright Canada LLP. Trial counsel included Kate McGrann (now of Crawley MacKewn Brush LLP).
The defendant CIBC Mellon Trust Company, as represented by Jeffrey Leon of Bennett Jones LLP, did not appear on appeal.
The defendant The Bank of New York, as custodian, made no appearance at trial or on appeal.
In mid-August 2007, the Canadian market for third-party sponsored ABCP froze. A number of conduits were unable to issue new notes to repay maturing notes. Conduits, including Devonshire, called on liquidity providers to fund liquidity. Barclays did not provide liquidity, citing the non-existence of a “Market Disruption Event.”
On August 16, 2007, conduit operators, liquidity providers, asset providers (including Barclays) and investors entered into a standstill agreement (the “Montreal Accord”) to allow for restructuring negotiations to take place. From December 2007 on, the Devonshire restructuring negotiations occurred outside of the broader Montreal Accord.
On January 13, 2009, the same day the Montreal Accord restructuring was being finalized, Barclays purported to conditionally pay Devonshire's liquidity demands and terminate the swaps. Barclays sued Devon-shire alleging that it was insolvent and therefore subject to an “Event of Default.” Barclays claimed a loss of $1.2 billion and priority over $600 million in collateral held by the defendant Bank of New York (“BNY”). Devonshire issued a notice of termination on the same date and counter-claimed that noteholders were entitled to be repaid ahead of Barclays.
On consent, the trial was bifurcated. The first trial began in September 2010 before Justice Newbould, concluding in June 2011. For the purpose of this trial, it was assumed, among other things, that Devonshire's liquidity demands were valid.
In the trial judgment, Justice Newbould agreed with Barclays that Devonshire was insolvent. But, he held that Barclays was subject to an Event of Default because it had failed to pay Devonshire's liquidity demands. Barclays had a 3-day cure period to remedy its failure to pay, which Newbould J. found was extended by regular standstill extension agreements. Newbould J. found that Barclays had fraudulently misrepresented the state of its negotiations with noteholders in emails to Devonshire requesting a continuation of this standstill in the two business days prior to the termination date. Newbould J. granted rescission of two final extensions, entitling Devonshire to terminate the swaps.
Further, Newbould J. also determined that Barclays' termination of the transactions was ineffective because the manner in which it did so breached its duty of good faith to Devonshire.
Newbould J. also agreed with Devonshire that its noteholders have priority to any payment ahead of Barclays.
As an alternative finding, Newbould J. assessed Barclays' loss. Barclays claimed that its loss was some $1.2 billion. Newbould J. rejected the valuation approach of Barclays' expert witness and accepted, in part, the approach of Devonshire's expert witness. He held that Barclays' loss was $12,000 and reduced this loss to nil due to mitigation.
Barclays' appealed and in a unanimous decision, Goudge, Sharpe and Simmons JJ.A. dismissed Barclays' appeal, but varied the assessment of Barclays' loss.
The Court of Appeal upheld Newbould J.'s finding that Barclays had misrepresented the status of negotiations to Devonshire in January 2009, entitling Devonshire to a rescission of the final two extensions.
The Court of Appeal also upheld the finding of the trial judge that Barclays had breached its duty of good faith to Devonshire through the manner in which it terminated the swaps.
The Court of Appeal varied Justice Newbould's calculation of Barclays' loss to $264 million, subject to reduction for mitigation.
On appeal, Barclays was represented by Peter Howard, Eliot Kolers, and James Wilson of Stikeman Elliott LLP and assisted by William Scott of Stikemans. Trial counsel included Samaneh Hosseini, as well as Lindsay Love-Forester (the latter now of Lerners LLP).
Devonshire was represented by J. Thomas Curry, Monique Jilesen, Brendan Gray, and Brian Kolenda of Lenczner Slaght Royce Smith Griffin LLP and was assisted by Scott Rollwagen, then of Fasken Martineau DuMoulin LLP and now of Lenczner Slaght, and David Lemieux of Norton Rose Fulbright Canada LLP. Trial counsel included Kate McGrann (now of Crawley MacKewn Brush LLP).
The defendant CIBC Mellon Trust Company, as represented by Jeffrey Leon of Bennett Jones LLP, did not appear on appeal.
The defendant The Bank of New York, as custodian, made no appearance at trial or on appeal.
Lawyer(s)
Lindsey Love-Forester
Peter F.C. Howard
Brian Kolenda
Monique Jilesen
Scott M.J. Rollwagen
Kate M. McGrann
Tom Curry
Brendan Gray
Jeffrey S. Leon
William A. Scott
James S.F. Wilson
David Lemieux
Samaneh Hosseini
Eliot N. Kolers