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Court upholds preliminary injunction

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Hoosier Energy Rural Electric Cooperative has until the end of the year to find a replacement holder for its credit-default swap or an insurance company will be able to collect on the security. The 7th Circuit Court of Appeals made the ruling today in the financial contract involving the co-op, insurance company, and credit-default swap holder, in addition to upholding the District Court's preliminary injunction on the payout.

In Hoosier Energy v. John Hancock Life Insurance Co., et al., and Ambac Assurance Corp., et al., No. 08-4030, John Hancock agreed to pay Hoosier Energy $300 million for a 63-year lease for part-interest in a Hoosier Energy generation plant. Hoosier Energy agreed to lease it back to John Hancock for 30 years, making payments with the present value of $279 million.

Hoosier Energy entered into the credit-default swap agreement with Ambac to provide John Hancock additional security should Hoosier Energy fall into bankruptcy. As part of the agreement, if Ambac's credit rating dipped below a certain threshold, Hoosier Energy had 60 days to find a replacement that satisfied the contractual standards.

John Hancock tried to collect on the approximately $120 million in security from Ambac because its credit rating slipped and Hoosier Energy couldn't find a replacement after 120 days. The co-op was in negotiations with another company, but John Hancock wanted Ambac to pay up; Hoosier Energy then filed this suit. The District Court eventually issued a preliminary injunction. The District Court ruled that if Ambac pays, Hoosier Energy will go bankrupt covering the outlay, which the District Court called an irreparable injury. It directed Hoosier Energy to post a bond to make sure John Hancock would be made whole should it prevail.

The Circuit Court found there is uncertainty about how this suit will come out under New York law, which the parties agreed supplies the rule of decision. It's not certain whether Hoosier Energy had a duty to replace Ambac or whether this is merely an option, wrote Chief Judge Easterbrook, and the impossibility defense is unavailable if the option characterization is correct. It's uncertain whether the extent of the 2008 credit crunch was foreseeable and whether Hoosier Energy could have replaced Ambac by offering more, or better, security to another intermediary, the chief judge continued.

"All of these uncertainties collectively support the district court's conclusion that Hoosier Energy has some prospect of prevailing on the merits. Because appellate review is deferential, the district court's understanding must prevail at the interlocutory stage," he wrote.

The chief judge noted the longer the impasse continues, the more the balance of equities tilts in favor of John Hancock.

"If, as Hoosier Energy asserts, meeting Ambac's demands under the swap contract will drive it into bankruptcy, then Hoosier Energy must be skating close to the edge, and the longer it skates there the greater the cumulative risk that it will fall over. Similarly Ambac may become less desirable as a swap partner; while this appeal has been under advisement, Ambac's credit rating has been reduced twice," he wrote.

John Hancock is entitled to the security it negotiated against these possible outcomes and the injunction bonds, at only $22 million in liquid security, don't cover the company's exposure. The change in Ambac's credit rating requires the District Court to take a new look at the adequacy of the Rule 65(c) security after receiving the Circuit Court's mandate, wrote Chief Judge Easterbrook. If Hoosier Energy hasn't produced a replacement for Ambac by the end of 2009, the District Court must let John Hancock realize its security.

"The district court itself stressed the word 'temporary' in 'temporary commercial impracticability'; we are confident that the court will not allow 'temporary' to drag out in the direction of permanence," he wrote.

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  1. Justice has finally been served. So glad that Dr. Ley can finally sleep peacefully at night knowing the truth has finally come to the surface.

  2. While this right is guaranteed by our Constitution, it has in recent years been hampered by insurance companies, i.e.; the practice of the plaintiff's own insurance company intervening in an action and filing a lien against any proceeds paid to their insured. In essence, causing an additional financial hurdle for a plaintiff to overcome at trial in terms of overall award. In a very real sense an injured party in exercise of their right to trial by jury may be the only party in a cause that would end up with zero compensation.

  3. Why in the world would someone need a person to correct a transcript when a realtime court reporter could provide them with a transcript (rough draft) immediately?

  4. This article proved very enlightening. Right ahead of sitting the LSAT for the first time, I felt a sense of relief that a score of 141 was admitted to an Indiana Law School and did well under unique circumstances. While my GPA is currently 3.91 I fear standardized testing and hope that I too will get a good enough grade for acceptance here at home. Thanks so much for this informative post.

  5. No, Ron Drake is not running against incumbent Larry Bucshon. That’s totally wrong; and destructively misleading to say anything like that. All political candidates, including me in the 8th district, are facing voters, not incumbents. You should not firewall away any of voters’ options. We need them all now more than ever. Right? Y’all have for decades given the Ds and Rs free 24/7/365 coverage of taxpayer-supported promotion at the expense of all alternatives. That’s plenty of head-start, money-in-the-pocket advantage for parties and people that don’t need any more free immunities, powers, privileges and money denied all others. Now it’s time to play fair and let voters know that there are, in fact, options. Much, much better, and not-corrupt options. Liberty or Bust! Andy Horning Libertarian for IN08 USA House of Representatives Freedom, Indiana

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