In Hoosier Energy Rural Electric Cooperative, Inc. v. John Hancock Life Insurance Company et al. (Case No. 1:08-cv-1560-DFH-DML) (S.D. Ind. 2008), the United States District Court of the Southern District of Indiana granted plaintiff, Hoosier Energy Rural Electric Cooperative, Inc.’s motion for a preliminary injunction against John Hancock Life Insurance Company.

At issue was a complex transaction between John Hancock and Hoosier Energy (known as a “sale in – lease out” or SILO) which required Hoosier Energy to obtain a “credit default swap” from Ambac. The parties agreed that if Hoosier Energy defaulted under the contract with John Hancock, then John Hancock could demand a termination payment from Ambac, and Ambac could turn to Hoosier Energy for payment. As part of the agreement between John Hancock and Hoosier Energy, it was agreed that if Ambac’s credit dropped below a specific threshold, Hoosier Energy would have 60 days to find a new provider; the failure of Hoosier Energy to do so would be considered a default thereby entitling John Hancock to demand an early termination payment from Ambac.

In June 2008, Ambac’s credit rating dropped to a level below that required in the contract between Hoosier Energy and John Hancock. Hoosier Energy immediately began to try and replace Ambac, and informed John Hancock of its efforts along with a warning that it could take more than 60 days to replace Ambac due to the extraordinary state of the credit markets. After negotiating with different entities, ultimately, on September 8, 2008, Hoosier Energy received a proposal from Berkshire Hathaway, and on October 3, 2008, John Hancock agreed to extend the replacement period for 20 days. A term sheet was executed and forwarded to John Hancock. However, Hoosier Energy needed an additional 90 day extension to close the deal with Berkshire Hathaway; John Hancock did not respond to the request for extension. The replacement period was due to expire on October 22, and on October 23, 2008, John Hancock rejected the request for extension and notified Hoosier Energy that an “event of default” had occurred under the contract. John Hancock advised Ambac that it would expect the termination payment of approximately $120 million on October 31, 2008. Such a payment would trigger a duty on the part of Hoosier Energy to pay Ambac either $120 million immediately, or at least $26 million immediately followed by installment payments over 4 years totaling $160 million. Ambac stated that it was ready, willing, and able to make the required payment unless enjoined from doing so. Hoosier Energy filed the subject action seeking a TRO, and subsequently a preliminary injunction, to preclude any parties from making payments pursuant to John Hancock’s notification that Hoosier Energy was in default. The court granted the preliminary injunction on several grounds including “temporary commercial impracticability” which “excuses performance until circumstances have changed, plus a reasonable time afterwards.

Specifically, the court ruled as follows:

The crisis certainly was not anticipated in 2002, when the deal between Hoosier Energy, Ambac, and John Hancock was being finalized. Retrospect will not assist John Hancock here, nor will an assertion that it was Hoosier Energy’s responsibility to prepare for and guard against any imaginable commercial calamity. After all, “foreseeable” is different from “conceivable.”…Hoosier Energy has come forward with evidence indicating that the obstacles it faced were not specific to Ambac but were the product of the credit crisis that effectively but temporarily froze the market for comparable credit products at any price. Those effects were not anticipated and could not have been guarded against.