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FINANCE ONE PUBLIC v. LEHMAN BROS. SPECIAL FINAN.

August 2, 2002

FINANCE ONE PUBLIC COMPANY LIMITED, PLAINTIFF,
V.
LEHMAN BROTHERS SPECIAL FINANCING, INC., DEFENDANT.



The opinion of the court was delivered by: Motley, District Judge.

OPINION AND ORDER

The dispute in this case involves a derivative trading relationship between plaintiff Finance One Public Company Limited ("Fin One"), which until its collapse in 1997 was the largest financial institution in Thailand, and defendant Lehman Brothers Special Financing, Inc. ("LBSF"), a corporate entity through which Lehman Brothers Inc. ("Lehman Brothers"), the investment banking firm, engages in international derivative transactions. At issue is whether LBSF was entitled to avoid paying $9.7 million it admittedly owed Fin One under their derivative trading contract by acquiring from a related Lehman Brothers entity certain negotiable debt instruments issued by Fin One and asserting Fin One's debt under those instruments as a set-off. Although the face value of the debt instruments LBSF acquired and asserted as a set-off was in the neighborhood of $9.7 million and thus purportedly erased LBSF's debt to Fin One almost in full, in reality the debt instruments LBSF acquired were virtually worthless due to Fin One's insolvency.

The parties dispute which law — New York or Thai — applies to the various claims and defenses at issue in this case. Because it would have been unnecessarily burdensome to require the parties to brief their already complex cross-motions for summary judgment under both New York and Thai law, the court directed the parties to brief the choice of law issues in advance of briefing the merits of their motions. The court resolved most of the choice of law issues in a memorandum opinion filed on December 4, 2001, holding that New York law controls whether LBSF is liable to Fin One under the derivative trading contract; that Thai law controls whether Fin One is liable to LBSF under the acquired debt instruments; that New York law controls whether the derivative trading contract affords LBSF the right to assert the acquired debt instruments as a set-off; and that the question of which law controls whether LBSF possessed an extra-contractual setoff right would be resolved by applying New York's interest analysis. See Fin. One Pub. Co. Ltd. v. Lehman Bros. Special Fin., Inc., No. 00 Civ. 6739, 2001 WL 1543820 (Dec. 4, 2001) (hereinafter "December 4 Order").

The parties have now fully briefed the remaining choice of law issue as well as the merits of their cross-motions. For the reasons set forth more fully below, the court holds: (1) that the derivative trading contract does not afford LBSF the right to assert the acquired debt instruments as a set-off; (2) that the derivative trading contract does not expressly preclude LBSF from asserting the set-off; (3) that Thai law controls whether LBSF possessed an extra-contractual set-off right; (4) that it will be necessary for the court to appoint a special master to assist it in resolving the thorny question of whether LBSF possessed an extra-contractual set-off right under Thai statutory, constitutional, and administrative law; and (5) that LBSF is entitled to summary judgment with respect to Fin One's good faith and fair dealing claim.

BACKGROUND

Fin One is a publicly traded company organized under the laws of the Kingdom of Thailand. Headquartered in Bangkok, Fin One was — until it was shut down by the Thai government in 1997 — the single largest financial institution in Thailand. As such, Fin One regularly engaged in interest rate and currency derivative transactions in order to hedge against risks associated with fluctuating interest and currency rates.

LBSF is a Delaware corporation headquartered in New York. LBSF is a wholly owned subsidiary of Lehman Brothers, the investment banking firm, and is one of the entities through which Lehman Brothers engages in international derivative transactions.

In 1995, Fin One and LBSF decided to pursue an ongoing derivative trading relationship, and in June of that year they negotiated and entered into a master contract governing the basic terms of that relationship. The parties executed an ISDA Master Agreement, which is a standard form contract created by the International Swaps and Derivatives Association for use by entities engaging in derivative trading. The ISDA Master Agreement itself contains no individually tailored terms, but it does contemplate the incorporation of additional schedules through which the parties could and did negotiate terms governing such contingencies as default, termination, settlement, and choice of law. The Master Agreement and its schedules were to be incorporated expressly into each of the individual interest rate and currency swap transactions executed by the parties, thus rendering it unnecessary for the parties to negotiate and agree to terms from scratch every time they wanted to execute a transaction.

Fin One and LBSF executed four interest rate and currency swap transactions between July 1995 and October 1996. Three of these transactions provided that the parties would exchange a certain amount of Thai baht for a certain amount of U.S. dollars on a specified future date, and one was a similar transaction involving the exchange of Thai baht and Japanese yen. Each of these transactions was documented by swap confirmation papers incorporating the terms of the Master Agreement and its schedules.

Beginning in late 1996, Southeast Asia became crippled by a severe financial crisis. Thailand, which had been one of the region's most prosperous economies in the early and mid-1990s, was among the nations hit hardest by this crisis. Interest rates soared, and the value of the Thai baht plummeted. By June 1997 Fin One was insolvent, defaulting on promissory notes and other financial obligations to a multitude of creditors. In order to protect the remaining assets of Thailand's largely insolvent financial sector, the Thai Ministry of Finance stepped in and issued a series of orders beginning on June 26, 1997. Among other things, the Ministry of Finance ordered Fin One to suspend its operations indefinitely. Although Fin One's overall financial condition was terrible, the soaring interest rates and plummeting baht had caused Fin One to do extraordinarily well in its four derivative trades with LBSF. By June 1997, LBSF owed Fin One almost $10 million as a result of those transactions.

Prior to the financial crisis, Fin One had routinely issued negotiable debt instruments known as bills of exchange. The holder of a bill of exchange is entitled to redeem the note for a certain sum of money on a specified future date. In September 1996, Fin One issued eight bills of exchange to Lehman Brothers (Thailand) Ltd. ("Lehman (Thailand)"), a Lehman Brothers entity incorporated and headquartered in Bangkok that regularly invests in the debt instruments of Thai financial institutions. Lehman (Thailand) subsequently acquired another four Fin One bills of exchange. On their face, these twelve bills of exchange were redeemable in late 1997 for a total of 305 million baht, but as Fin One became insolvent in mid 1997 the bills of exchange became nearly worthless.

In late June 1997, as it became increasingly clear that Fin One would not be able to weather the mounting financial crisis, Lehman (Thailand) sold its Fin One bills of exchange to LBSF. Though no cash changed hands between the two Lehman entities, LBSF purportedly paid Lehman (Thailand) close to face value for the notes. LBSF and Lehman (Thailand) reflected payment for the transaction by crediting and debiting their respective intra-Lehman accounts.

On July 25, 1997, LBSF informed Fin One that it was terminating the derivative transactions based upon a "material adverse change," which Fin One agrees it was entitled to do under the Master Agreement. Four days later, LBSF informed Fin One that it had calculated its debt to Fin One under those terminated transactions to be $9.7 million but that it was asserting the bills of exchange it had acquired from Lehman (Thailand) as a setoff. According to LBSF, the set-off reduced its outstanding debt to Fin One from $9.7 million to just over $12,000. Fin One filed the instant lawsuit against LBSF for breach of contract and breach of the duty of good faith and fair dealing in September 2000, claiming that LBSF had no right to erase its debt under the derivative transactions by asserting the bills of exchange as a ...


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