Court Filing (abstract)

Case 1:10-cv-00017-WHP, Filed 08/09/10

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK
USDC SDNYDOCUMENTELECTRONICALLYFILED
DOC #:
DATE FILED:~$ ~(C)

KA KIN WONG, et al.,10 Civ. 0096 (WHP)Appeal from Bankruptcy
Plaintiffs/Appellants,Case No. 08-13555 (JMP)
-against-
HSBC USA, INC., et al.,Defendants/Appellees.

WILLIAM H. PAULEY III, District Judge:

Plaintiffs/Appellants Ka Kin Wong and six other noteholders appeal from twoorders of the United States Bankruptcy Court for the Southern District of New York (Peck,Bankr. J.)(the "Bankruptcy Court") dated November 23, 2009 and December 3, 2009 dismissingtheir Class Action Complaint (the "Complaint") with prejudice. While the events giving rise tothis adversary proceeding are complicated, two discrete issues are presented on appeal: (1)whether Plaintiffs have standing to sue, and (2) whether amendment of the Complaint would befutile.For the following reasons, this Court affirms in part, reverses in part, and vacates in part the Bankruptcy Court's orders.

BACKGROUND

1.Parties on Appeal

Plaintiffs seek to represent a class of purchasers of structured finance notes-alsoknown as "Minibonds"between June 16, 2003 and September 15, 2008. (Appellants'Designation of Contents of the Record Designation Number ("DN") 1: Complaint against HSBC,USA, et al. dated Mar. 12, 2009 ("Compl.") ¶ 1.) Plaintiffs brought claims against PacificInternational Finance Limited ("Pacific Finance" or the "Issuer"), the issuer of the Minibonds, aswell as several other entities and individuals. (Compl. ¶¶ 27-38.) The underlying transactionsand relationships among the various entities are opaque.

On appeal, Plaintiffs pursue their claims against only two entities: HSBC BankUSA, N.A. ("HSBC Bank" or the "Trustee"), and Lehman Brothers Special Financing, Inc.("LBSF"). HSBC Bank is the trustee of collateral securing Pacific Finance's paymentobligations to the Minibonds holders and LBSF. In the Complaint, Plaintiffs mistakenly namedHSBC Bank's predecessor as trustee, (DN 6 Ex. 2: Affidavit of Song Qun Sworn, ProgrammeProspectus dated Mar. 12, 2007 at 7), and now appeal the Bankruptcy Court's denial of leave toamend the Complaint to name HSBC Bank. Defendant LSBF is a bankrupt Delawarecorporation and a debtor in the underlying bankruptcy proceedings, which involve severalLehman entities (the "Lehman Bankruptcy"). (Compl.IT38, 67.)


II.The Minibonds Program

Plaintiffs seek damages and injunctive relief relating to $1.6 billion in Minibonds issued by Pacific Finance in separate, but virtually identical, series. (Compl. ¶ 45.) PacificFinance sold the Minibonds to retail investors located primarily in Hong Kong, and marketedthem as "credit-linked" to financially stable companies and backed by AAA-rated collateral.(Compl. ¶¶ 45, 47, 51.) As a consequence of Lehman Brothers Holdings, Inc.'s ("LehmanBrothers") collapse, the Minibonds are now worthless. (Compl.T~67-69, 101-04.)

While the Minibonds were issued by Pacific Finance, Lehman Brothers and otherLehman entities designed the Minibonds program. (Compl. ¶¶ 46, 48, 50, 82.) The details ofLehman Brothers' involvement emerged during an inquiry conducted by Hong Kong regulatoryauthorities. In that proceeding, officers of HSBC Holdings Plc ("HSBC Holdings"), thecompany at the top of the HSBC pyramid, testified that Lehman Brothers appointed HSBC Bankas trustee of the Minibonds collateral.'(Compl. ¶ 82.) Lehman Brothers also compiled theprospectus for each Minibonds series. (Compl. ¶ 82.) Pacific Finance existed only "to issue the[Minibonds]. It [was for] all intents and purposes a creature of Lehman's design .... [PacificFinance was] not an active company ... and HSBC's role as a Director [was] not an active role.. . ." (Compl. 182.) Indeed, the Complaint alleges that Lehman Brothers and LBSF, not the Issuer, "selected the collateral" for the Minibonds. (Compl. ¶ 50.)

Pacific Finance secured its obligation to pay interest to the Minibonds holdersthrough two related transactions.'First, Pacific Finance purchased notes from Saphir FinancePublic Limited Company (the "Saphir Notes"). (DN 9 Ex.1, Ex. B: Tenth Supplemental Trust

1 The Hong Kong testimony in the Complaint does not distinguish among the various HSBC andLehman entities. At times, it is difficult to discern the specific entity referenced in the testimony.

Deed ("Tenth Deed") at 1.) The Saphir Notes were placed in trust with HSBC Bank as Trustee.(Tenth Deed at 1.) Pacific Finance also executed a credit default swap agreement with LBSF.(Tenth Deed at 1; Compl. 154.) Under the credit default swap, LBSF agreed to pay PacificFinance a sum equal to what Pacific Finance owed the Minibonds holders in exchange for theinterest earned by Pacific Finance on the Saphir Notes. (Tenth Deed at 15-16.) Because LehmanBrothers and LBSF exercised control over the Minibonds program, Plaintiffs assert that LBSF"negotiate[d] with itself over the essential terms of the swap agreements." (Compl. 150.)

The Saphir Notes are governed by a principal trust deed and a supplemental trustdeed issued for each series of Minibonds. (Compl.IT84-85.) These trust deeds and theprospectuses advertising the Minibonds sale set forth the "duties and obligations" of the Trusteeand the Issuer. (Compl.~T84-87.) The trust deeds contain,inter alia,provisions governing thepriority of payment in the event the Saphir Notes are liquidated. (Compl.IT84, 90.) The partiesdisagree about the operation of these provisions and who has priority to the Saphir Notes.Choice of law provisions in the trust deeds provide that they are to be construed under Englishlaw. (DN 9 Ex. 1: Principal Trust Deed ("Principal Trust Deed"), Sec. 17(a).) The prospectusesrepresented that "neither Lehman Brothers Holdings, Inc. nor any of its subsidiaries or affiliateshas any equity interest in, or any control over, us [Pacific Finance/HSBC]." (Compl. ¶¶ 84, 87.)

According to the Complaint, Pacific Finance is controlled by HSBC Bank(Cayman) Limited ("HSBC Cayman"). (Compl. 129.) In turn, HSBC Cayman is controlled byHSBC Holdings. (Compl. ¶ 31.) HSBC Holdings also controls the Trustee's predecessor,

2 Plaintiffs brought claims against other entities and individuals alleging rights to collateralpurchased as part of additional transactions. (Compl.118,32-37, 110, 118.) Because Plaintiffsdo not appeal the Bankruptcy Court's dismissal of these claims, that collateral is not at issue.

HSBC Bank USA.3(Compl. 13 1.)
Another HSBC entity---HSBC Bank Plc-filed a claim for $234 million in theLehman Bankruptcy. (DN 30 Ex. 6: Amended Schedule of Assets and Liabilities for LehmanBrothers at 3.) In addition, a Lehman Bankruptcy Examiner's report published after the orderson appeal discloses that HSBC Holdings and Lehman Brothers cooperated extensively duringLehman's collapse to ensure that Lehman Brothers satisfied its obligations to HSBC Holdings.(Report of Anton R. Valukas, Examiner, dated Mar. 11, 2010 at 1321-26.)

III.Procedural History

On October 3, 2008, LBSF filed for bankruptcy. (Counter-Designation of ItemsTo Be Included In Record On Appeal ("C-DN") 10: Supplement to Proof of Claim in Chapter 11Case of LBSF ¶ 10; Compl. ¶ 67.) Thereafter, LBSF's counsel informed HSBC Bank that anyattempt to liquidate the Saphir Notes may be subject to the automatic stay provisions of theUnited States Bankruptcy Code and demanded the Trustee cease all further action. (DN 30 Ex.5: Pls.' Opp'n to Def. [LBSF's] Mot. to Dismiss the Compl., Letter dated Nov. 25, 2008.)HSBC Bank complied.

On March 12, 2009, Plaintiffs filed an adversary proceeding in the BankruptcyCourt. Count One of the Complaint seeks a declaratory judgment that the Minibonds collateral isthe property of the Minibonds holders, not the bankruptcy estate, based on breaches of contractand fiduciary duty by the Issuer and Trustee. (Compl. ¶¶ 97-108.) Count Two seeks to enjoin LBSF and the Trustee from impairing the Minibonds collateral and requests transfer of the

3 This Court presumes that an amended complaint would include the same allegation.

collateral to the Minibonds holders. (Compl.IT109-13.) Count Three seeks a resulting orconstructive trust on the Minibonds collateral for the benefit of the Minibonds purchasers.(Compl. ¶¶ 114-21.) Finally, the remaining counts of the Complaint-Counts Four throughThirteen-assert damages claims for breach of contract, breach of fiduciary duty, negligence,unjust enrichment, and aiding and abetting against the Trustee, the Issuer, and the Issuer'sdirectors and parent company. (Compl. ¶¶ 122-89.)

On May 27, 2009, LBSF and HSBC Bank USA each moved to dismiss theComplaint. (DN 5: Notice of HSBC USA, Inc.'s Mot. to Dismiss the [Complaint], Abstain orStay the Adversary Proceeding; DN 9: Notice of Mot. of [LBSF] for an Order Dismissing theAdversary Compl.)

In a ruling from the bench, Bankruptcy Judge Peck dismissed the Complaint. TheBankruptcy Court dismissed Counts One through Three for lack of standing on three principalgrounds. First, relying on the trust deeds and English law, the Bankruptcy Court held thatPlaintiffs lack standing to bring a direct claim against Defendants. The relevant provisions of thetrust deeds state that "[a] person who is not a party to [the deed] has no right under the Contracts(Rights of Third Parties) Act 1999 [("Contracts Act of 1999")] to enforce any term of [the deed]except and to the extent (if any) that [the deed] expressly provides for such Act to apply to any ofits terms." (Principal Trust Deed at 3; Tenth Deed at 3). The Bankruptcy Court held that"[t]hese provisions fit squarely within the tenets of governing English law," which "provides thatit is a trustee and not a beneficiary of a trust that is the appropriate party to bring an action onbehalf of the trust beneficiaries." (Tr. of Nov. 18, 2009 Hr'g (the "Bankr. Ct. Ruling") at 25.)

Second, the Bankruptcy Court held that it would be futile to allow Plaintiffs to amend the Complaint to bring a derivative claim on behalf of the Trustee. (Bankr. Ct. Ruling at26.) Construing English law, the Bankruptcy Court concluded that a trust beneficiary may stepinto the shoes of the Trustee and sue on its behalf only in special circumstances. (Bankr. Ct.Ruling at 26.) Applying this standard, the Bankruptcy Court reasoned that (i) the "mere fact thatthe trustee has not filed a lawsuit [seeking to enforce Plaintiffs' right to the Minibonds collateral]is not a sufficient `special circumstance;"' and (ii) the fact that an HSBC affiliate filed a proof ofclaim in the Lehman Bankruptcy does not establish that the Trustee is conflicted because "thereis no allegation of any actual conflict." (Bankr. Ct. Ruling at 26.)

Third, the Bankruptcy Court concluded that it would be futile to allowamendment of the Complaint to name the proper trustee-HSBC Bank-"for the reasons setforth in this ruling." (Bankr. Ct. Ruling at 22.) However, it is not apparent from the transcript ofthe ruling what those reasons were.

The Bankruptcy Court also dismissed Counts Four through Thirteen because theywere "not related to the debtors' proceedings." (Bankr. Ct. Ruling at 29.) The Bankruptcy Courtstated that an adversary proceeding is considered related to a bankruptcy case "if the outcomemight have a conceivable [e]ffect on the estate." (Bankr. Ct. Ruling at 28.) After noting thatCounts Four through Thirteen "involve tort, breach of contract and breach of fiduciary dutyclaims against various defendants, none of whom are debtors" in the Lehman Bankruptcy,(Bankr. Ct. Ruling at 27), the Bankruptcy Court held that "[i]nasmuch as Counts [Four] through[Thirteen] comprise actions governed by foreign law between two or more non-debtors, suchclaims, regardless of the outcome, will not affect the debtor's bankruptcy cases.... Resolutionof these claims will have no [e]ffect on the rights of debtors or creditors in the debtors' bankruptcy cases, nor will it have any [e]ffect on the debtors' estates." (Bankr. Ct. Ruling at 29.)DISCUSSION

1.Standard of Review

A district court reviews a bankruptcy court's findings of fact for clear error and itslegal conclusionsde novo.Fed. R. Bankr. P. 8013;In re Vouzianas,259 F.3d 103, 107 (2d Cir.2001);In re Bennett Funding Grp., Inc.,146 F.3d 136, 138 (2d Cir. 1998). The dismissal of acomplaint is a legal conclusion which is subject tode novoreview.Selevan v. N.Y. ThruwayAuth.,584 F.3d 82, 88 (2d Cir. 2009) ("We reviewde novoa district court's dismissal of acomplaint for lack of standing.");see alsoRaine v. Lorimar Prods., Inc.,71 B.R. 450, 452(S.D.N.Y. 1987) (`Because this is an appeal from [a Bankruptcy Court's] decision on a motionto dismiss for failure to state a claim, purely legal considerations are involved, and thus thiscourt's review must bedenovo.").When reviewing such a dismissal, a court "accept[s] allfactual allegations in the complaint and draw[s] all reasonable inferences in the plaintiff's favor."ATSI Commcn's, Inc. v. Shaar Fund, Ltd.,493 F.3d 87, 98 (2d Cir. 2007).

Generally, "[a] bankruptcy court's denial of a request to amend [the complaint] isreviewed for abuse of discretion."In re Calpine Corp.,406 B.R. 463, 472 (S.D.N.Y. 2009)(citingIn re Enron Corp.,419 F.3d 115, 124 (2d Cir. 2005)). However, "[i]f that denial wasbased on an interpretation of law," such as the determination that an amendment would be futile,a court employsde novoreview. SeeDougherty v. Town of N. Hempstead Bd. of ZoningAppeals,282 F.3d 83, 87 (2d Cir. 2002);see alsoRicciuti v. N.Y. City Transit Auth.,941 F.2d119, 122-24 (2d Cir. 1991) (reviewingde novothe lower court's determination that amendment would be futile).

A court "should freely give leave [to amend the Complaint] when justice sorequires." Fed. R. Civ. P. 15(a)(2). Particularly where a court grants a motion to dismiss, "theusual practice is to grant leave to amend."Hayden v. Cnty. of Nassau,180 F.3d 42, 53 (2d Cir.1999).A court may deny leave to amend as futile only "if the proposed claim could notwithstand a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)."Lucente v. Int'l Bus. Mach.Corp.,310 F.3d 243, 258 (2d Cir. 2002). Indeed, futility means that it is "beyond doubt that theplaintiff can prove no set of facts in support of his amended claims."Pangburn v. Culbertson,200 F.3d 65, 70 (2d Cir. 1999) (quotations and citations omitted).

II.Claims Against LBSF: Counts One & Two

Plaintiffs appeal the dismissal of their direct claims against LBSF and the denialof leave to replead those claims derivatively. This Court addresses Count Three of theComplaint separately for the reasons articulated in Section IV,infra.

a. Direct Claim Against LBSF

Plaintiffs appeal the Bankruptcy Court's dismissal of their direct claims againstLBSF on two principal grounds: (1) Plaintiffs have standing under English law to sue LBSFdirectly because LBSF is a co-beneficiary under the trust; and (2) the Bankruptcy Court'sreliance on the provisions of the trust deeds prohibiting non-parties from enforcing the deeds'terms was misplaced. Because Plaintiffs lack standing under English law to bring a direct claimagainst LBSF, this Court need not address Plaintiffs' second contention.

Under English law, a trustee generally has "a duty to protect and preserve the trust estate for the benefit of the beneficiaries ...."Alsop Wilkinson v. Neary,[ 1996] 1 W.L.R.1220, 1224 (Ch.). As such, "[n]ormally [it is] the trustee who has a right of action [and] is theproper person to enforce [the trust]."Hayim v. Citibank NA,[1987] A.C. 730, 733 (P.C.); seealsoAlsop,1W.L.R. at 1224 ("Trustees have a duty to ... represent the trust in a third partydispute."). Plaintiffs seek to circumvent this general principle by invoking the so-called"beneficiaries dispute" theory.Under that theory, "where the dispute is between rival claimantsto a beneficial interest in the subject matter of the trust.... the duty of the trustee is to remainneutral and ... leav[e] it to the rivals to fight their battles."Alsop,1W.L.R. at 1225.

Plaintiffsargue this theory applies here because LBSF persuaded the Bankruptcy Court that it is abeneficiary rather than a third party under the trust.

As a threshold matter, Plaintiffs mischaracterize the Bankruptcy Court's ruling.The Bankruptcy Court did not describe LBSF as a trust beneficiary. Instead, relying onGregsonv. HAE Trs. Ltd.,[2008] EWHC 1006 (Ch.), the Bankruptcy Court found that the Trustee wasthe appropriate party to bring an action on behalf of the trust beneficiaries, InGregson,a trustbeneficiary brought suit against the director of a corporate trustee for impairment of trustproperty. The beneficiary argued that a corporate trustee's claims against its directors are heldfor the trust's beneficiaries, thereby empowering them to sue directly.Gregson,EWHC 1006 at119,22.TheGreszsoncourt rejected this notion and described the general rule that "a director ofa trustee company does not owe a fiduciary duty to the beneficiary of the trust," and absent thatduty, a trust beneficiary has no direct claim against the director.Gregson,EWHC 1006 atIT44,56, 69.

As the Gregsonanalysis illustrates, the core inquiry is whether the potentially liable third party owed a duty to the trust's beneficiaries. SeeGregson,EWHC 1006 at¶T44,46, 57-58 (stating that if a direct claim against the directors was valid, it would "circumvent theclear and established principle that no direct duty is owed by the directors to the beneficiaries");see alsoRoberts v. Gill & Co,[2010] UKSC 22, ¶¶ 46, 110 (S.C.) (beneficiary sought to amendto bring a derivative claim where it was "accepted that a claim that the [third parties] owed aduty of care to the beneficiaries would be difficult to sustain").While LBSF is a party to thetrust deeds, Plaintiffs do not allege the existence of any fiduciary relationship betweenthemselves and LBSF, Accordingly, the Bankruptcy Court properly held that Plaintiffs lackstanding under English law to sue LBSF directly.

b.Derivative Claims Against LBSF

The Bankruptcy Court also concluded that re-pleading derivative claims againstLBSF would be futile because Plaintiffs cannot allege the existence of special circumstances. Inmaking this determination, the Bankruptcy Court considered Plaintiffs' allegations that theTrustee failed to bring suit against LBSF and that an HSBC entity filed a proof of claim in theLehman Bankruptcy.

Under English law, a trust beneficiary may bring a derivative suit against a thirdparty when "special circumstances" are present. The "special circumstances"rule, articulated inHayim v. Citibank NA,provides:

[A] beneficiary has no cause of action against a third party save inspecial circumstanceswhich embrace a failure, excusable orinexcusable, by the trustees to the beneficiary to protect the trustestate or to protect the interests of the beneficiary in the trustestate.Hayim,A.C. 730 at 748. The Supreme Court of the United Kingdom recently addressed the "special circumstances" rule and summarized the relevant authorities as follows:
The special circumstances which were identified in the earliestauthorities as justifying a beneficiary's action were fraud on thepart of the trustee, or collusion between the trustee and the thirdparty, or the insolvency of the trustee, but it has always been clearthat these are merely examples of special circumstances, and thatthe underlying question is whether the circumstancesaresufficiently special to make it iust for the beneficiary to have theremedy.Roberts,UKSC 22 at746, 114 (emphasis added). The Supreme Court of the United Kingdomnoted that a court has "wide latitude in evaluating ... special circumstances," taking into account"all [of] the relevant circumstances."Roberts,UKSC 22 at ¶¶ 76, 78, 114.

Through the prism of these English law principles, this Court concludes that the Bankruptcy Court erred in finding that Plaintiffs cannot allege special circumstances. Despite representations in the Minibonds prospectuses that neither Lehman Brothers nor any of itssubsidiaries exercised control over the Issuer, Lehman Brothers designed the Minibonds programand directed the Issuer's activities.As a party to the trust deeds, LSBF was substantiallyinvolved in that process. The Issuer then created a trust that, in certain circumstances, distributesits only collateral to aLehmanentity, rather than the trust'ssolebeneficiary. Juxtaposed againstthe promise that the Minibonds would be secured by highly-rated collateral, this is an odd result.SeeRoyal Brunei Airlines Sdn Bhd v. Tan,[1995] 2 A.C. 378, 386-87 (P.C.) ("If, for his ownpurposes, a third party deliberately interferes in that relationship by assisting the trustee indepriving the beneficiary of the property held for him by the trustee, the beneficiary should beable to look for recompense to the third party as well as the trustee.");see alsoRoberts,UKSC22 at ¶¶ 46, 114 ("[T]he underlying question is whether the circumstances are sufficiently specialto make it just for the beneficiary to have the remedy.");In re Field,[ 1971 ] 1 W.L.R. 555, 561

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(Ch.)(holding that special circumstances existed and "justice require[d] that the plaintiff, who isthe only other person interested [in the property], should be allowed to have [his claim] properlytried before a court"), Furthermore, the recently released Examiner's report reveals cooperationbetween HSBC and Lehman Brothers at the highest levels during Lehman Brothers' collapse.

Given the totality of these circumstances, this Court cannot find that it is "beyond doubt that theplaintiff[s] can prove no set of facts in support of [their] amended claims."Pangburn v.Culbertson,200 F.3d 65, 70 (2d Cir. 1999).

On appeal, the parties advance arguments concerning the operation of the trustdeeds' payment priority provisions and potential class certification problems caused by asettlement arranged by Hong Kong regulatory authorities.While interesting, these arguments areextraneous to the issue of standing; they concern the merits of Plaintiffs' claims and are notbefore this Court on appeal. At this stage of the litigation, Plaintiffs should be permitted toreplead Counts One and Two as derivative claims against LBSF. The Bankruptcy Court's denialof leave to replead is reversed.

III.Claims Against the Trustee: Counts One & Two

Plaintiffs also contend that the Bankruptcy Court erred in denying leave to amendthe Complaint to name HSBC Bank as the Trustee. The Bankruptcy Court held that amendingthe Complaint would be futile for the reasons set forth in its ruling, but did not articulate thosereasons.

As an initial matter, the Bankruptcy Court's analysis of English case law ignoredthe differences between Plaintiffs' relationship with the Trustee and Plaintiffs' relationship with LBSF and the other dismissed entities. Under English law, "the basic right of a beneficiary is tohave the trust duly administered in accordance with the provisions of the trust instrument ... andthe general law."Target Holdings Ltd. v. Redferns,[1996] 1 AC 421, 434 (H.L.).When atrustee unlawfully administers the trust, a trust beneficiary may sue the trustee directly. SeeHayim,A.C. at 735 ("The beneficiaries have a right to enforce the trust directly against the ...trustee.");Bartlett v. Barclays Bank Trust Co. Ltd.,[1980] 2 W.L.R. 430, 444, 452 (Ch.)(holding a trustee liable to the trust beneficiaries for willful "breach of trust");see alsoTargetHoldings,1AC at 437 ("A trustee who wrongly pays away trust money ... commits a breach oftrust and comes under an immediate duty to remedy such breach.").

The Bankruptcy Court heldthat the trustee is the proper party to bring suit on behalf of a trust beneficiary.While that mayexplain Plaintiffs' lack of standing to sue LBSF directly, it does not resolve the issue of whethera beneficiary has standing to sue his trustee. Indeed, Counts One and Two are premised onalleged breaches of contract and fiduciary duty by the Trustee for failing to distribute the SaphirNotes to Plaintiffs.

The standing provisions of the trust deeds provide that a non-party to the trust hasno right under the Contracts Act of 1999 to enforce any of the deeds' terms.While theBankruptcy Court held that these provisions fit squarely within English law, it merely quoted theprovisions without analyzing their language or the statute on which they rely. Notably, theContracts Act of 1999 allows a non-party to a contract to enforce the contract's terms if they"purport[] to confer a benefit on him," Contracts Act of 1999, c. 31, § 1 (U.K.), but expresslystates that it does not "affect any right or remedy of a third party that exists or is available apartfrom th[e] Act." Contracts Act of 1999, c. 31, § 7. Thus, while the trust deeds deprive Plaintiffs of rights derived from the Contracts Act of 1999, Plaintiffs may hold rights outside of the Act, anissue the Bankruptcy Court did not consider.

Finally, the Bankruptcy Court's rationale for dismissing Counts Four throughThirteen fails to render futile an amended complaint naming the correct trustee. The BankruptcyCourt reasoned that these counts involve questions of foreign law which will have no effect onthe rights of debtors or creditors in the underlying bankruptcy. The applicable rule is that "[a]proceeding is `related to' a [bankruptcy] case ... if the outcome might have a `conceivableeffect' on the estate."In re New 118th LLC,396 B.R. 885, 890 (Bankr. S.D.N.Y. 2008) (citingIn re Cuyahoga Equip. Corp.,980 F.2d 110, 114 (2d Cir. 1992)). A conceivable effect is onewhich "could alter the debtor's rights, liabilities, options, or freedom of action (either positivelyor negatively) and which in any way impacts upon the handling and administration of thebankrupt estate."In re New 118th LLC,396 B.R. at 890 (citingIn re Pacor, Inc.,743 F.2d 984,994 (3d Cir. 1984),overruled on other grounds byThings Remembered, Inc. v. Petrarca,516U.S. 124, 134-35 (1995)). In this case, Plaintiffs seek to prevent the transfer of the SaphirNotes-worth $1.6 billion-to the bankruptcy estate. The effect of $1.6 billion on thebankruptcy estate is self-evident.Moreover, by instructing the Trustee to postpone distributionof the Saphir Notes, LBSF-not Plaintiffs-tethered the Saphir Notes to the LehmanBankruptcy. Accordingly, the Bankruptcy Court's denial of leave to replead Counts One andTwo against the Trustee is reversed.

IV.Constructive & Resulting Trust Claims: Count Three

In Count Three of the Complaint, Plaintiffs seek to impose a constructive or resulting trust on the Mimbonds collateral.While the Bankruptcy Court made a passingreference to these claims, it provided no analysis in its ruling. Understandably, the BankruptcyJudge was juggling a host of complex and urgent issues. Nonetheless, this Court cannot discernwhy the constructive and resulting trust claims were dismissed. SeeIn re Gucci,309 B.R. 679,685 (S.D.N.Y. 2004) ("This Court ... has no way of knowing whether and to what extent thedefense or elements thereof were rejected as a matter of law, [and] the reasons for any suchrejection ....").A constructive trust relies on equitable, as opposed to contractual and formaltrust, principles.See, e.g.,Counihan v. Allstate Ins. Co„194 F.3d 357, 361 (2d Cir. 1999) ("Aconstructive trust is an equitable remedy ... [whose] purpose is to prevent unjust enrichment.").Without some analysis of why standing principles derived from the trust deeds' and English lawapply to claims for a constructive or resulting trust, denial of leave to replead Count Threeagainst both the Trustee and LBSF was inappropriate. SeePanaburn,200 F.3d at 70 (denial ofleave to replead is warranted only when it is "beyond doubt that the plaintiff can prove no set offacts in support of [the] amended claims").Moreover, it is not evident whether these claims aregoverned by English law, an issue the Bankruptcy Court did not address. Accordingly, the Bankruptcy Court's dismissal of Count Three is vacated and remanded for further consideration.

CONCLUSION

For the foregoing reasons, the Bankruptcy Court's dismissal of Counts One andTwo against LBSF is affirmed, and its denial of leave to replead those claims derivatively against LBSF is reversed. The Bankruptcy Court's denial of leave to replead Counts One and Twoagainst the Trustee is reversed. The Bankruptcy Court's dismissal of Count Three is vacated.This action is remanded to the Bankruptcy Court for further proceedings consistent with thisMemorandum and Order.

Dated: August 9, 2010
New York, New York

SO ORDERED:

WILLIAM H. PAULEY IIIU.S.D.J.

Counsel of Record:

Jason C. Davis, Esq.
Robbins Geller Rudman & Dowd LLP100 Pine Street, Suite 2600
San Francisco, CA 94111

Counsel for Appellants

Howard Grant Sloane, Esq.Cahill Gordon & Reindel LLP80 Pine Street
New York, NY 10005

Counsel for the HSBC Appellees

Richard W. Slack, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153

Counsel for Appellee Lehman Brothers Special Financing, Inc.

David S. Cohen, Esq.
Milbank, Tweed, Hadley & McCloy LLP
1850 K Street, NW
Washington, DC 20006

Counsel for Intervenor Official
Committee of Unsecured Creditors of Lehman Brothers HoldingsInc. et al.

Lehman, HSBC May Be Sued by Hong Kong Investors in New York

Aug. 10 (Bloomberg) -- Lehman Brothers Holdings Inc. and HSBC Holdings Plc may be sued over $1.6 billion in worthless securities sold to retail investors in Hong Kong, a judge in New York ruled yesterday.

U.S. District Judge William H. Pauley III reversed part of a decision by Lehman’s bankruptcy judge, who threw out a suit by seven holders of structured financial notes called minibonds. The plaintiffs seek to represent a class of investors in the notes from June 16, 2003, to Sept. 15, 2008, Pauley said in his decision.

An estimated $1.8 billion of minibonds were sold to about 43,000 investors in Hong Kong, according to local regulators. Lehman’s bankruptcy in 2008 wiped out the value of the investments, resulting in protests outside bank branches that have continued even after last year’s government-brokered settlement between sellers and buyers of minibonds.

“This shows that the courts around the world have investor protection at heart and investors should be protected against mis-selling by those that gain commissions from these types of investment products,” said Lewis Man, a partner at Hong Kong law firm Gall.

Hong Kong doesn’t have a mechanism for filing class action lawsuits.

David Hall, a Hong Kong-based spokesman for HSBC, didn’t immediately have a response to the ruling. Kimberly Macleod, a Lehman spokeswoman, didn’t return a voice-mail message left yesterday seeking comment.

Dismissal Reversed

In two orders, issued in November and December, U.S. Bankruptcy Judge James Peck ruled that the plaintiffs lacked standing to sue and that any attempt to revise their complaint would be futile. Pauley yesterday reversed the dismissal of one count against HSBC and Lehman and permitted the plaintiffs to amend two dismissed counts.

Pacific International Finance Ltd. issued the minibonds and marketed them as linked to the credit of financially sound companies and backed by AAA-rated collateral, Pauley said. A Hong Kong regulatory investigation disclosed that Lehman designed the minibonds program, the judge said. HSBC Bank USA was selected as trustee of the collateral securing the notes, Pauley said, citing testimony in the Hong Kong proceeding.

Public outcry over the collapse of the minibonds led to street protests in Hong Kong and an investigation by regulators into how banks sold the products. The head of the city’s securities watchdog, Martin Wheatley, was called repeatedly to testify before Hong Kong’s legislature.

Two BOC Hong Kong (Holdings) Ltd. managers in June pleaded not guilty in the city’s District Court to charges of fraudulently selling minibonds. BOC Hong Kong was the biggest seller of the securities. The trial of the two employees starts in November.

Hong Kong banks offered to pay at least 60 cents on the dollar to investors in July last year as part of a buyback agreement brokered by the SFC. In an Aug. 6 press release, Hong Kong’s central bank said more than 13,000 cases were resolved by the repurchase agreement, and 179 Lehman-related complaints remain under investigation.

To contact the reporter on this story: Bob Van Voris in New York atrvanvoris@bloomberg.net; Debra Mao in Hong Kong atdmao5@bloomberg.net