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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. From his recent appearance on WRTV to this story here, Frank is everywhere. Couldn't happen to a nicer guy, although he should stop using Eric Schnauffer for his 7th Circuit briefs. They're not THAT hard.

  2. They learn our language prior to coming here. My grandparents who came over on the boat, had to learn English and become familiarize with Americas customs and culture. They are in our land now, speak ENGLISH!!

  3. @ Rebecca D Fell, I am very sorry for your loss. I think it gives the family solace and a bit of closure to go to a road side memorial. Those that oppose them probably did not experience the loss of a child or a loved one.

  4. If it were your child that died maybe you'd be more understanding. Most of us don't have graves to visit. My son was killed on a state road and I will be putting up a memorial where he died. It gives us a sense of peace to be at the location he took his last breath. Some people should be more understanding of that.

  5. Can we please take notice of the connection between the declining state of families across the United States and the RISE OF CPS INVOLVEMENT??? They call themselves "advocates" for "children's rights", however, statistics show those children whom are taken from, even NEGLIGENT homes are LESS likely to become successful, independent adults!!! Not to mention the undeniable lack of respect and lack of responsibility of the children being raised today vs the way we were raised 20 years ago, when families still existed. I was born in 1981 and I didn't even ever hear the term "CPS", in fact, I didn't even know they existed until about ten years ago... Now our children have disagreements between friends and they actually THREATEN EACH OTHER WITH, "I'll call CPS" or "I'll have [my parent] (usually singular) call CPS"!!!! And the truth is, no parent is perfect and we all have flaws and make mistakes, but it is RIGHTFULLY OURS - BY THE CONSTITUTION OF THIS GREAT NATION - to be imperfect. Let's take a good look at what kind of parenting those that are stealing our children are doing, what kind of adults are they producing? WHAT ACTUALLY HAPPENS TO THE CHILDREN THAT HAVE BEEN RIPPED FROM THEIR FAMILY AND THAT CHILD'S SUCCESS - or otherwise - AS AN ADULT.....

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