In Re: Lehman Brothers Holdings Inc.

Filing 15

MEMORANDUM AND ORDER: The motion to dismiss the appeal (docket no. 11) is granted.(Signed by Judge Naomi Reice Buchwald on 10/26/2011) Copies Mailed By Chambers. (rdz)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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In re
LEHMAN BROTHERS HOLDINGS INC., et al.,
Debtors.
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KA KIN WONG, SIU LUI CHENG, TIM CHOY
FUNG, LIN TEI TSE, SAU KING TSE, LAI
KUEN CHAN, FUK SHING WONG, SIU KWAN
WONG, YEE MING SHEN, YUEN FUN TANG,

MEMORANDUM AND ORDER
11 Civ. 2721 (NRB)

Appellants,
- against HSBC BANK USA, NATIONAL ASSOCIATION,
LEHMAN BROTHERS SPECIAL FINANCING INC.,
LEHMAN BROTHERS HOLDINGS INC., and BNY
CORPORATE TRUSTEE SERVICES LIMITED,
Appellees.
----------------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE

Appellants Ka Kin Wong, Siu Lui Ching, Tim Choy Fung, Lin
Tei Tse, Sau King Tse, Lai Kuen Chan, Fuk Shing Wong, Siu Kwan
Wong, Yee Ming Shen, and Yuen Fun Tang appeal from an order of
the United States Bankruptcy Court for the Southern District of
New York (the “Bankruptcy Court”), entered on March 3, 2011,
which sets forth alternative dispute resolution procedures for
disputes relating to certain derivative transactions (the “ADR
Order”). Lehman Brothers Special Financing Inc. (“LBSF”) joins

Lehman Brothers Holdings Inc. (“LBHI” and, together with LBSF,
“Lehman”) in opposing the appeal.
For the reasons stated herein, we grant Lehman’s motion to
dismiss the appeal and decline to address appellants’ arguments
on the merits.
BACKGROUND1
Appellants are a subset of investors who own, or owned and
maintain beneficial interests in, collateralized notes referred
to

as

“Minibonds”

that

were

issued

by

Pacific

International

Finance Limited (“Pacific Finance”), a special purpose vehicle
(“SPV”).

In

connection

with

the

issuance

of

the

Minibonds,

Pacific Finance entered into a swap agreement with LBSF. Pacific
Finance used the proceeds of the Minibonds sales to purchase
collateral (the “Saphir Notes”), which secured Pacific Finance’s
obligation to pay LBSF and the Minibonds noteholders. HSBC Bank
USA, National Association (“HSBC”) holds the Saphir Notes in
trust.
LBHI provided the credit necessary to support the Minibonds
program, and its insolvency in 2008 triggered a default event,
making the Saphir Notes redeemable. LBHI voluntarily filed for
bankruptcy on September 15, 2008, but HSBC neither liquidated

1

Unless otherwise noted, the facts below are drawn from Lehman’s Motion to
Dismiss Appeal and the exhibits thereto, appellants’ Opposition to Motion to
Dismiss Appeal and the exhibits thereto, and Lehman’s Reply Brief in Support
of Their Motion and the exhibits thereto.

2

nor

distributed

the

Saphir

Notes.

LBSF

filed

for

bankruptcy

eighteen days later, on October 3, 2008.
Appellants filed suit in the Bankruptcy Court on March 12,
2009, alleging that LBSF had prevented the liquidation of the
Saphir Notes. The Bankruptcy Court dismissed the complaint on
the grounds that the appellants lacked standing to sue LBSF
directly, but after an appeal the appellants were permitted to
amend

their

complaint

to

allege

derivative

claims.

Lehman’s

motion to dismiss the amended complaint is pending.
On January 25, 2010, in a separate adversary proceeding,
the Bankruptcy Court issued an order (the “Ipso Facto Order”)
holding

that

provisions

in

swap

agreements

that

would

alter

LBSF’s payment priority based on LBHI’s bankruptcy are barred by
the

ipso

facto

protections

of

Sections

365(e)(1)

and

541(c)(1)(B) of the Bankruptcy Code. See Lehman Bros. Special
Fin., Inc. v. BNY Corp. Trustee Servs. Ltd. (In re Lehman Bros.
Holdings, Inc.), 422 B.R. 407, 418-20 (Bankr. S.D.N.Y. 2010).
BNY Corporate Trustee Services Limited (“BNY”) moved for leave
to appeal the order, which was granted by District Court Judge
Colleen McMahon on September 23, 2010. LBSF and BNY, however,
settled the dispute at the end of 2010, before a district court
had made any determinations on the merits of the order.
LBSF moved for entry of the ADR Order in the main Lehman
bankruptcy proceeding on November 24, 2010. The omnibus order

3

establishes

procedures

for

non-binding

mediation

of

disputes

involving SPVs and pertains to a number of adversary proceedings
in the Lehman bankruptcy. Although the order requires SPVs to
participate in mediation, it does not require any party to enter
into a settlement, nor does it preclude settlement outside of
the provided procedures.
Objections to the motion for the ADR Order were to be filed
“seven (7) calendar days before the applicable hearing date or
. . . [by] any date and time otherwise ordered by the Court.”
Second Am. Order Implementing Certain Notice & Case Management
Procedures,

In

re

Lehman

Bros.

Holdings

Inc.,

No.

08-13555,

docket no. 9635, at ¶ 32 (Bankr. S.D.N.Y. June 17, 2010). LBSF
noticed the motion hearing for December 15, 2010, and a number
of objections were filed on December 8, 2010, though appellants
were not among the objectors. Five days later, the hearing was
adjourned to January 13, 2011. Appellants objected to the motion
on January 6, 2011, requesting exemption from the order for all
claims pertaining to the Minibonds transactions. The Bankruptcy
Court overruled the objection as untimely and entered the ADR
Order on March 3, 2011. On April 21, 2011, appellants appealed
the order to this Court, without moving for leave to appeal.
While the ADR Order was being litigated below, LBSF was
also working toward a settlement with the SPVs and trustees,
including Pacific Finance and HSBC, involved with the Minibonds

4

transactions

(the

“Settlement”).

The

trustees

had

made

no

distributions to either the Minibonds noteholders or LBSF since
the initiation of the Lehman bankruptcy proceedings, and the
Settlement provided that the noteholders would receive 70% of
their principal at minimum. The Settlement required approval of
a supermajority of the Minibonds holders who voted on it, and in
May 2011 the noteholders voted overwhelmingly in favor of the
Settlement.
DISCUSSION
Appeals from a bankruptcy court to a district court are
governed

by

28

U.S.C.

§

158(a).

That

section

provides,

in

relevant part, that district courts “shall have jurisdiction to
hear

appeals

(1)

from

final

judgments,

orders,

and

decrees;

. . . and (3) with leave of the court, from other interlocutory
orders and decrees.” This Court does not have jurisdiction to
hear the appeal of the ADR Order.
I.

The ADR Order Is Not a Final Order
Under the “flexible” approach to determining finality in

bankruptcy cases, an appellant may appeal as of right if the
order appealed from is one that “finally dispose[s] of discrete
disputes within the larger case,” where a “dispute” is “at least
an

entire

claim

on

which

relief

may

be

granted.”

Shimer

v.

Fugazy (In re Fugazy Express, Inc.), 982 F.2d 769, 775-76 (2d
Cir. 1992) (internal quotation marks and alterations omitted).

5

If

an

order

pertaining

does

to

a

not

“completely

discrete

claim,

resolve

all

including

of

issues

the
as

issues
to

the

proper relief,” it is not final. Id. at 776; accord Flor v. BOT
Fin. Corp. (In re Flor), 79 F.3d 281, 283 (2d Cir. 1996).
By its terms, the ADR Order simply does not have an effect
on

any

proceedings

that

can

be

deemed

“final.”

Although

participation with the dispute resolution procedures contained
in the order is mandatory for parties to adversary proceedings
involving SPVs, “no party is required to settle or compromise”
their dispute. ADR Order, In re Lehman Brothers Holdings Inc.,
No.

08-13555,

Mar. 3,

2011).

docket

no.

The

order

14789,

at

¶

5(a)

specifically

(Bankr.

provides

S.D.N.Y.

that

“[n]o

rights, remedies, claims or defenses” of any noteholder “shall
be impaired, waived or compromised in any further proceedings in
these

cases

should

no

settlement

or

compromise

result

from

participation” in the alternative dispute resolution process.
Id. at ¶ 5(e).
The ADR Order is thus wholly procedural, establishing the
rules by which non-binding mediation is to be governed, but
itself resolving no claims and nowhere obligating any party to
settle its claims. Thus, the sine qua non of a final order is
absent. See Shimer, 982 F.2d at 776; see also In re Adelphia
Commc’ns Corp., 333 B.R. 649, 659-60 (S.D.N.Y. 2005) (holding
that

an

order

that

“direct[s]

6

the

parties

to

engage

in

or

participate in further proceedings and do[es] not resolve any
substantive issue” is not final); XO Commc’ns, Inc. v. Start
Invs., Inc. (In re XO Commc’ns, Inc.), No. 03 Civ. 1898, 2004
U.S. Dist. LEXIS 2879, at *13 (S.D.N.Y. Feb. 25, 2004) (“[A]n
order

staying

an

action

and

directing

arbitration

.

.

.

is

interlocutory and unappealable.”).
II.

Interlocutory Appeal of the ADR Order Is Not Appropriate
The

propriety

of

granting

leave

to

appeal

non-final

bankruptcy court orders is gauged by the same standards used in
other interlocutory appeals.2 See XO Commc’ns, 2004 U.S. Dist.
LEXIS 2879, at *7; see also 28 U.S.C. § 158(c)(2). Such appeals
are acceptable only when the order appealed from “involves a
controlling question of law as to which there is substantial
ground for difference of opinion” and when “an immediate appeal
from the order may materially advance the ultimate termination
of the litigation.” 28 U.S.C. § 1292(b).
Appellants fail to satisfy these standards. “A ‘controlling
question

of

bankruptcy

law’

court's

is

one

order

where
would

‘either
terminate

(1)

reversal

of

the

action,

or

(2)

the

determination of the issue on appeal would materially affect the
outcome

of

the

litigation.’”

Alfa,

S.A.B.

de

C.V.

v.

Enron

Creditors Recovery Corp. (In re Enron Creditors Recovery Corp.),

2

Appellants did not file a motion for leave to appeal as required by Federal
Rule of Bankruptcy Procedure 8001(b). The Court nevertheless considers their
notice of appeal as such a motion. See Fed. R. Bankr. P. 8003(c).

7

No. 03-92677, 2009 U.S. Dist. LEXIS 98611, at *31 (S.D.N.Y.
Oct. 16, 2009) (quoting Alexander v. Bank of Woodstock (In re
Alexander), 248 B.R. 478, 483 (S.D.N.Y. 2000)). But the instant
appeal hinders, rather than advances, the termination of the
litigation, and the issue appealed has no impact on the merits
of any proceeding.
If, counterfactually, appellants were to succeed on this
appeal and the ADR Order was vacated, the parties would have one
fewer mechanism by which to engage in settlement discussions.
Disrupting the settlement process, which narrows the field of
issues remaining before the Bankruptcy Court, is antithetical to
advancing

the

termination

of

the

litigation.

Moreover,

as

discussed above, the ADR Order is simply procedural in nature,
so its reversal could not affect the outcome of any litigation.
Even if the ADR Order did have some substantive effect, it
applies only to a subset of the adversary actions in the Lehman
bankruptcy. Irrespective of how any disputes pertaining to the
ADR Order are resolved, the non-SPV adversary proceedings will
continue without even a slight shift in course. The appeal would
thus

fail

to

materially

advance

the

termination

litigation

or

otherwise

affect

its

outcome.

of

See

the
Dev.

Specialists, Inc. v. Akin Gump Strauss Hauer & Feld, LLP (In re
Coudert Bros. LLP), 447 B.R. 706, 712 (S.D.N.Y. 2011) (finding
that, because at least four adversary proceedings stemming from

8

the underlying bankruptcy would be unaffected by the appeal, it
would not materially affect the litigation’s outcome).
The instant appeal thus neither implicates a controlling
question of law nor materially advances the termination of the
litigation. It would therefore be improper to grant a motion for
leave to appeal the interlocutory ADR Order.
Moreover, interlocutory appeal is not a path this Court
embarks

upon

lightly.

Courts

in

this

district

require

the

presence of “exceptional circumstances” before granting a motion
for

leave

to

appeal.

E.g.,

Flor,

79

F.3d

at

284

(quoting

Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21, 25 (2d Cir.
1990)); Enron Corp. v. JP Morgan Sec., Inc. (In re Enron Corp.),
No.

03-92677,

2008

U.S.

Dist.

LEXIS

7340,

at

*10

(S.D.N.Y.

Jan. 25, 2008) (quoting In re Worldcom, Inc., No. 02-13533, 2003
U.S. Dist. LEXIS 11160, at *29 (S.D.N.Y. June 30, 2003)). No
such circumstances are present here. The complex nature of the
underlying transactions and the identities and relationships of
the parties do not change the fact that this is, at bottom, an
appeal of a commonplace order directing non-binding mediation,
well

within

General

Order

a

court’s
M-390,

In

power
re

to

issue.

Adoption

of

See

Bankr.

Procedures

S.D.N.Y.
Governing

Mediation of Matters ¶ 1.1 (Dec. 1, 2009).
At best, appellants argue that the ADR Order should be
vacated because, absent vacatur, Lehman might be able to settle

9

certain SPV adversary disputes with the leverage provided by a
wholly separate order. To be clear, that order -- the Ipso Facto
Order -- is no longer subject to a pending appeal and is not
properly before this Court on this appeal from the ADR Order.3
Thus, appellants ask us to review a non-final order for the
purpose

of

preventing

possible

settlements

that

may

be

influenced by an issue which is not pending on appeal.
Clearly, to state the basis of the appeal is to reject it.

3

Appellants’ argument that Judge McMahon’s grant of an interlocutory appeal
of the Ipso Facto Order demonstrates that a similar appeal should be granted
for the ADR Order is baseless. The parties in that appeal did not contest
whether a controlling question of law was at issue, see BNY Corp. Trustee
Servs. Ltd., No. 09-1242, docket no. 130, slip op. at 11 (Sept. 20, 2010),
and the appealed order was a grant of summary judgment, not the procedural
order before us.

10

CONCLUSION

For the foregoing reasons, the motion to

smiss the appeal

(docket no. 11) is grant

Dated:

New York, New York
October 26, 2011

~(~
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE

11

Copies of the foregoing Order have been mailed on this date to
the following:
Attorneys for Appellants
Jason C. Davis
Luke O. Brooks
Matthew S Melamed
Robbins Geller Rudman & Dowd LLP
Post Montgomery Center
One Montgomery Street, Suite 1800
San Francisco, CA 94104

Samuel H. Rudman
David A. Rosenfeld
Robbins Gel
Rudman & Dowd LLP
58 South Service Road, Suite 200
Melville, NY 11747
Spencer A. Burkholz
Darryl J. Alvarado
Robbins Geller Rudman & Dowd LLP
655 West Broadway, Suite 1900
San Diego, CA 92101
John H. Genovese
Paul J. Battista
David C. Cimo
Robert F. Elgidely
Genovese Joblove & Battista, P.A.
Bank of America Tower, 44th Floor
100 Southeast Second Street
Miami, FL 33131
Attorney for Appellees
Richard W. Slack
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153

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