Finance One Pub. v. Lehman Bros. Special Financing

• Decision Date: 12 July 2005
• Docket Number: No. 03-9049(L).,No. 03-9096(XAP).,03-9049(L).,03-9096(XAP).
• Citation: 414 F.3d 325
• Parties: FINANCE ONE PUBLIC COMPANY LIMITED, Plaintiff-Appellee-Cross-Appellant, v. LEHMAN BROTHERS SPECIAL FINANCING, INC., Defendant-Appellant-Cross-Appellee, Sompong Sucharitkul, Dr., Special Master.<SMALL><SUP>1</SUP></SMALL>
• Court: U.S. Court of Appeals — Second Circuit

Page 325

414 F.3d 325

FINANCE ONE PUBLIC COMPANY LIMITED, Plaintiff-Appellee-Cross-Appellant, v. LEHMAN BROTHERS SPECIAL FINANCING, INC., Defendant-Appellant-Cross-Appellee,

Sompong Sucharitkul, Dr., Special Master.¹

No. 03-9049(L).

No. 03-9096(XAP).

United States Court of Appeals, Second Circuit.

Argued: November 8, 2004.

Decided: July 12, 2005.

COPYRIGHT MATERIAL OMITTED

Scott E. Eckas, King & Spalding LLP (Jeffrey Q. Smith and Jennifer L. Hurley, on the brief), New York, NY, for Defendant-Appellant-Cross-Appellee.

Aaron Rubinstein, Kaye Scholer LLP (Michael M. Pomerantz and Carly Henek, on the brief), New York, NY, for Plaintiff-Appellee-Cross-Appellant.

Michael S. Feldberg and Joshua D. Cohn, Allen & Overy LLP, New York, NY, for Amicus Curiae International Swaps and Derivatives Association.

WALKER, Chief Judge, POOLER and WESLEY, Circuit Judges.

POOLER, Circuit Judge.

BACKGROUND

This is a contract dispute in diversity between a Thai company and a Delaware corporation. Plaintiff-appellee-cross-appellant Finance One Public Company Ltd. ("Finance One"), a now-defunct publicly traded Thai corporation with its principal place of business in Bangkok, was once the largest financial company in Thailand. Defendant-appellant-cross-appellee Lehman Brothers Special Financing, Inc. ("LBSF"), a Delaware corporation with its principal place of business in New York, is part of the Lehman Brothers family of companies, and is used as Lehman Brothers' global vehicle for derivatives transactions. In 1995, LBSF and Finance One entered into a derivatives trading relationship.

The International Swaps and Derivatives Association ("ISDA"), the principal industry association of the derivatives industry, publishes a standard form contract known as the "Master Agreement," which is the industry standard in general use worldwide for formalizing derivatives trading arrangements.² The Master Agreement³ consists of 18 pages of terms uniform across contracts, and calls for parties to attach a "Schedule" containing other terms individually tailored to their particular relationship. The Master Agreement contains a choice-of-law clause directing parties to specify governing law in the Schedule. It contains a forum-selection clause requiring parties to submit to the jurisdiction of either English or New York courts if the Schedule selects English or New York law, respectively, to govern the agreement. LBSF and Finance One executed a contract consisting of the Master Agreement and an attached Schedule on June 30, 1995. In the Schedule, the parties chose New York law as the "governing law." Individual transactions were to be documented in "Confirmations" whose form was specified in the Schedule.

In 1995 and 1996, LBSF and Finance One entered into four derivatives transactions. The parties entered into interest-rate and currency swap transactions on July 7, 1995, January 12, 1996, and October 24, 1996. On February 28, 1996, another Lehman company entered into a currency option transaction with Finance One that it subsequently assigned, with the consent of Finance One, to LBSF effective April 26, 1996. Each of the swap transactions, and assignment of the currency option transaction, was negotiated by Finance One representatives in Bangkok and LBSF representatives in Tokyo or Hong Kong, and was listed in LBSF records as originating in the Tokyo or Hong Kong offices of LBSF. The Confirmations were mailed from LBSF's New York headquarters.

In September and October 1996, Finance One issued seven bills of exchange, with a total face value of 175,000,000 Thai baht, to Lehman Brothers (Thailand), Ltd. ("LBT"), a Thai company with its principal place of business in Bangkok, and another member of the Lehman family. These bills were Thai baht-denominated negotiable debt instruments with a one year term to maturity. In March 1997 LBT purchased from a third party an additional five bills of exchange issued by Finance One, with a total face value of 130,000,000 Thai baht and a maturity date of January 12, 1998.

In 1996 Thailand, like much of southeast Asia, entered the throes of a financial crisis. The Thai Ministry of Finance intervened in an attempt to mitigate the damage to the country's financial sector, ultimately issuing an order on June 26, 1997, suspending business operations of Finance One for thirty days. On June 24 or 25, 1997, before the Ministry of Finance order was issued, representatives of LBT and LBSF had negotiated the transfer of the 12 bills of exchange to LBSF. In return for transferring the bills to LBSF, LBT received a credit on inter-company accounts in the amount of the value at which the bills had been carried on LBT's books. The bills were endorsed over to LBSF by their custodian, Bangkok Bank, on June 27, 1997, pursuant to authorization from LBT.

On July 25, representatives from LBSF's Hong Kong and Tokyo offices visited Finance One's Bangkok office to propose that Finance One allow LBSF to set off the face value of the bills of exchange against LBSF's derivatives obligations, offering Finance One a $1 million bonus to seal the deal. Finance One rejected the offer, stating that payment of the bills was prohibited by the Ministry of Finance's June order. That same day, a Lehman representative wrote to Finance One terminating the four derivatives transactions "in accordance with the terms of the Confirmations relating to such Transactions." Also that same day, an LBSF representative presented the bills for payment at Finance One's Bangkok office, was refused, and filed a customary "notice of dishonor and protest" with the Royal Thai Police Department. The Ministry of Finance issued another order dated July 25, 1997, extending Finance One's suspension indefinitely.

By letter dated July 29, 1997, LBSF notified Finance One that it had calculated the aggregate amount LBSF owed to Finance One under the derivative transactions as $9,664,204, and was setting off against this amount the value of the bills, which was $9,651,898.73, leaving a balance of $12,305.27 in Finance One's favor, which LBSF paid. On December 8, 1997, Finance One ceased operations entirely and was placed under the supervision of the newly created Financial Sector Restructuring Authority to wind up its affairs, liquidate its assets, and pay off its creditors.

On September 7, 2000, Finance One commenced this lawsuit, in which it seeks $9,651,898.73 in damages for breach of contract and breach of the duty of good faith and fair dealing based on LBSF's failure to pay the entirety of its derivatives obligation. After discovery was completed, both parties declared their intention to move for summary judgment at a status conference in September 2001. Because the parties disagreed about the applicable law, LBSF asserting that New York law applied and Finance One that Thai law applied, the district court ordered a preliminary round of briefing on the choice-of-law issues. By memorandum opinion and order filed December 4, 2001, the district court found that to the extent that LBSF argued that its setoff right was created by the Master Agreement, this issue would be governed by New York law in accord with the Master Agreement's choice-of-law clause, but in the event that LBSF had to rely on other sources of law, the court was not prepared to decide which jurisdiction's law governed the question whether an "extra-contractual setoff right [existed] by operation of law." Finance One Pub. Co. v. Lehman Bros. Special Fin., Inc., No. 00 Civ. 6739, 2001 WL 1543820, at * 2, 2001 U.S. Dist. LEXIS 19923, at *6 (S.D.N.Y. Dec. 4, 2001). Finding the parties' briefing inadequate to resolve how New York courts would answer this choice-of-law question, the court ordered the parties to submit supplemental briefs addressing the outstanding choice-of-law issues. By opinion and order filed August 9, 2002, the court held that the Master Agreement did not itself either confer a setoff right or prohibit setoff, and that Thai law governed the existence or nonexistence of an extra-contractual setoff right. Finding it impossible to decide which party's experts on Thai law to credit, the court ordered that the parties submit lists of proposed special masters to identify and apply Thai law. See Finance One Pub. Co. v. Lehman Bros. Special Fin., Inc., 215 F.Supp.2d 395, 402-403 (S.D.N.Y.2002). The parties submitted their lists and objections, and the court appointed Dr. Sompong Sucharitkul, a professor at the Golden Gate University School of Law, as Special Master.

The Special Master submitted a report on January 17, 2003. The parties differ in their characterization of the report, Finance One characterizing it as finding no right to setoff under Thai law, but nevertheless going on to create one based on the Master's view of the equities, and LBSF characterizing it as finding an absolute right to setoff under Thai law, but nevertheless going on to limit it based on the Master's view of the equities. In fact, the Master clearly recognized the existence of a statutory right to setoff under Section 341 of the Thai Civil and Commercial Code. However, noting that it was unclear whether LBSF satisfied the statute's requirement that it be a bona fide purchaser for value, the Master recommended that the court "apply the law of [Thailand] as if the Court were to sit in judgment as a national court on site," exercising "all the judicial discretion pertaining to Thai Justices in simile casu." He explained that "LBSF could be deemed to have a right to set-off which is not unqualified ... a Thai court could exercise its judicial discretion in an equitable manner.... It would be for the Trial Judge to assess the residual value or the market value of the 12 Bills of Exchange in question for purposes of set-off." The Master then proposed a means of valuation: in order to ensure that LBSF was treated with the same priority as any other Finance One creditor, LBSF would receive a proportion of the bills'...