In the

United States Court of Appeals

For the Seventh Circuit ____________________

Nos. 08-4030 & 08-4248

HOOSIER ENERGY RURAL ELECTRIC COOPERATIVE, INC.,

Plaintiff-Appellee,

v.

JOHN HANCOCK LIFE INSURANCE COMPANY; OP MEROM 

GENERATION I, LLC; and MEROM GENERATION I, LLC,

Defendants-Appellants.

AMBAC ASSURANCE CORPORATION; COBANK, ACB; AE

GLOBAL INVESTMENTS, LLC; and AMBAC CREDIT 

PRODUCTS, LLC,

Defendants-Appellees.

____________________

Appeals from the United States District Court for the

Southern District of Indiana, Indianapolis Division.

No. 1:08-cv-1560-DFH-DML — David F. Hamilton, Chief Judge.

____________________

ARGUED JANUARY 5, 2009 — DECIDED SEPTEMBER 17, 2009†

____________________

Before EASTERBROOK, Chief Judge, and KANNE and 

WOOD, Circuit Judges.

EASTERBROOK, Chief Judge. Hoosier Energy, a co-op, had 

depreciation deductions that it could not use. John Hancock 

Life Insurance Co. had income exceeding its available deduc-

 

† This opinion is being released in typescript, and the mandate will issue 

today, so that the district court may hold a prompt hearing to reexamine the size of the injunction bond. A printed copy will follow.
Nos. 08-4030 & 08-4248 Page 2

tions. The two engaged in a transaction designed to move Hoosier Energy’s deductions to John Hancock. They entered into a 

leveraged lease: John Hancock paid Hoosier Energy $300 million for a 63-year lease of an undivided 2/3 interest in Hoosier 

Energy’s Merom generation plant. Hoosier Energy agreed to 

lease the plant back from John Hancock for 30 years, making 

periodic payments with a present value of $279 million. The $21 

million difference, Hoosier Energy’s profit, represents some of 

the value to John Hancock of the deductions that John Hancock could take as the long-term lessee of the power plant.

The transaction exposed John Hancock to several risks. The 

power station might become uneconomic before the parties’ 

estimate of its remaining useful life (roughly 30 years). Or Hoosier Energy might encounter financial difficulties in its business 

as a whole. As a debtor in bankruptcy, Hoosier Energy would 

be entitled to repudiate the lease, leaving John Hancock with a 

power station that it had no interest in operating. Hoosier Energy’s obligation as a repudiating debtor would be considerably 

less than the present value of the rentals. See 11 U.S.C. 

§502(b)(6). So Hoosier Energy agreed to provide John Hancock 

with additional security, in the form of both a credit-default 

swap and a surety bond. Ambac Assurance Corporation and 

three affiliates agreed to pay John Hancock approximately $120 

million if certain events occurred. (For its part, Hoosier Energy 

posted substantial liquid assets to Ambac’s credit, in order to 

protect Ambac should it be required to pay John Hancock; this 

was part of the transaction’s swap feature.) A credit-default 

swap, like a letter of credit, is a means to assure payment when 

contingencies come to pass, without proof of loss (as a surety 

bond would require). One of the contingencies in this transaction is a reduction in Ambac’s own credit rating. If that rating 

falls below a prescribed threshold, Hoosier Energy has 60 days 

to find a replacement that satisfies the contractual standards.

During 2008 Ambac’s credit rating slipped below the 

threshold. John Hancock then demanded that Hoosier Energy 

find a replacement, and it extended the deadline from 60 days 

to more than 120 days when Hoosier Energy reported trouble. 

Whether replacing Ambac was “impossible” at the time, as 

Hoosier Energy maintains, or just would have cost Hoosier Energy more than it was willing to pay, as John Hancock believes, 

is a subject that remains in dispute. When the extended deadline arrived, Hoosier Energy told John Hancock that it was in 
Nos. 08-4030 & 08-4248 Page 3

negotiations with Berkshire Hathaway to replace Ambac. John 

Hancock concluded that “in negotiations” was not good enough 

(perhaps it suspected Hoosier Energy of stalling) and called on 

Ambac to perform. Ambac is ready, willing, and able to meet its 

obligations. But before Ambac could pay, Hoosier Energy filed 

this suit under the diversity jurisdiction, and the district court 

issued a temporary restraining order. The justification for that 

order, since replaced by a preliminary injunction, is that if Ambac pays, it will demand that Hoosier Energy cover the outlay, 

and that this will drive Hoosier Energy into bankruptcy—a step 

that the district court called an irreparable injury.

Irreparable injury is not enough to support equitable relief. 

There also must be a plausible claim on the merits, and the injunction must do more good than harm (which is to say that the 

“balance of equities” favors the plaintiff). See Winter v. Natural 

Resources Defense Council, Inc., 129 S. Ct. 365 (2008); Illinois Bell 

Telephone Co. v. WorldCom Technologies, Inc., 157 F.3d 500 (7th 

Cir. 1998). How strong a claim on the merits is enough depends 

on the balance of harms: the more net harm an injunction can 

prevent, the weaker the plaintiff’s claim on the merits can be 

while still supporting some preliminary relief. See Cavel International, Inc. v. Madigan, 500 F.3d 544 (7th Cir. 2007); Girl Scouts of 

Manitou Council, Inc. v. Girl Scouts of the United States of America, 

Inc., 549 F.3d 1079 (7th Cir. 2008). The district court concluded 

that an injunction would have net benefits, because John Hancock would remain well secured in its absence (it remains the 

lessee of a power station that is essential to Hoosier Energy’s 

business, so Hoosier Energy will not abandon the lease), and 

that Hoosier Energy’s position on the merits is strong enough 

to support relief while litigation continues. 588 F. Supp. 2d 919 

(S.D. Ind. 2008). The district court also directed Hoosier Energy to post $2 million in cash, a $20 million injunction bond with sureties, and an unsecured bond of $130 million, to ensure 

that John Hancock would be made whole should it prevail in 

the litigation.

As for the merits: The district court thought that Hoosier 

Energy has two arguments with enough punch to justify interlocutory relief. The first is that the transaction is an abusive tax 

shelter. The district court observed that the Internal Revenue 

Service has declined to allow similar transactions to transfer 

deductions from one corporation to another and concluded 

that this transaction probably should be unwound. The second 
Nos. 08-4030 & 08-4248 Page 4

is that, under New York law (which the parties agree supplies 

the rule of decision), “temporary commercial impracticability” 

permits Hoosier Energy to defer coming up with another swap 

partner until the economy has improved.

John Hancock disputes both of these conclusions, but its 

appellate brief opens with the contention that Hoosier Energy 

lacks standing to complain. After all, John Hancock observes, 

Ambac is willing and able to perform. What interest does Hoosier Energy have in whether Ambac performs under a contract 

that, the parties agreed, would be deemed independent of Hoosier Energy’s promises? The answer is that, if Ambac pays John 

Hancock, then Hoosier Energy must pay Ambac. (The funds 

already on deposit with Ambac are insufficient to cover all of 

Hoosier Energy’s obligations.) A payout would be injury, caused 

by John Hancock’s acts, and remediable by a favorable judicial 

decision. That’s enough for standing under the Supreme 

Court’s precedents. See, e.g., Steel Co. v. Citizens for a Better Environment, 523 U.S. 83, 102–05 (1998).

This is a three-corner transaction (four-corner, if one counts 

the IRS). It was accomplished through a series of nominally independent contracts spanning more than 3,000 pages. But it 

would press legal fiction beyond the breaking point to say that 

the independent enforceability of each party’s promises to the 

others meant that any of the three parties lacked standing to 

complain about acts of the others that will produce an immediate, concrete injury. It may be that Hoosier Energy has waived 

its right to complain (that, too, is a subject on which litigation 

lies ahead), but a waiver is a defense on the merits, which differs 

from the absence of an Article III case or controversy.

On the subject of irreparable injury, appellate review is deferential at the preliminary injunction stage, and we lack an ade- quate basis on which to disagree with the district court’s assessment. That leaves the question whether Hoosier Energy has 

a plausible theory on the merits—not necessarily a winning one, 

but a claim strong enough to justify exposing John Hancock to 

financial risks until the district court can decide the merits. We 

do not agree with all of the district judge’s reasoning, but we do 

not think that the court erred in thinking Hoosier Energy’s 

claim sufficient for this limited purpose, given Ambac’s continuing ability to perform and the injunction bonds posted under Fed. R. Civ. P. 65(c).
Nos. 08-4030 & 08-4248 Page 5

Let us start with the question whether the transaction is an 

illegal tax shelter that must be unwound rather than enforced. 

The district court’s approach has two steps: First, the court 

concluded that the transaction lacks economic substance and 

therefore cannot be employed to transfer tax benefits from 

Hoosier Energy to John Hancock. Second, the court believed 

that a tax shelter that the Internal Revenue Code does not allow is “illegal” as a matter of contract law. The first of these 

steps may or may not be right; the tax treatment of leveraged 

leases, and related transactions such as the sale and leaseback, 

can be difficult. See, e.g., Frank Lyon Co. v. United States, 435 U.S. 

561 (1978). The second is wrong. A leveraged lease is a perfectly 

enforceable contract. Whether or not the contract lawfully 

transfers tax benefits, there is nothing wrong with, or illegal 

about, the contract itself; only the claim of tax benefits from the 

contract would be problematic.

All questions about tax benefits to one side, a leveraged 

lease is simply a loan secured by a lease rather than a mortgage. 

John Hancock needs to make investments in order to have 

money available to pay the death benefits on its life insurance 

policies. Often it invests in real estate. The transaction with 

Hoosier Energy is one in which John Hancock invested $300 

million in exchange for a promised stream of repayments that 

would last 30 years; it also obtained a security interest in the 

assets that Hoosier Energy would use to produce the funds for 

repayment. Neither New York nor Indiana would call such a 

transaction illegal, and the fact that a credit-default swap improved the lender’s security does not create any additional 

problem.

Hoosier Energy has not cited, and we have not found, any 

decision holding a leveraged lease or sale-and-leaseback unen- forceable as a matter of contract law, just because the main (or 

even the sole) reason for structuring the transaction that way, 

rather than as a loan, was tax benefits. “Economic purpose” is 

not a requirement for the enforceability of contracts. If the 

Green Bay Packers cut a player one day and then re-sign him 

the next, a court would not dream of canceling the new contract on the ground that a release-and-resign sequence lacks 

economic purpose. The Commissioner of Internal Revenue will 

address the question whether the leveraged-lease transaction 

provides John Hancock with the tax benefits it seeks. If the 

answer turns out to be no, Hoosier Energy still owes John Han-
Nos. 08-4030 & 08-4248 Page 6

cock the promised rental payments (and is entitled to keep the 

$21 million premium), while Ambac still provides security for 

those payments.

New York law is skeptical of contentions that irregular 

dealings between one contracting party and the government 

excuse the other contracting party’s performance. For example,

John E. Rosasco Creameries, Inc. v. Cohen, 11 N.E.2d 908, 909 

(N.Y. 1937), held that the dairy’s customer must pay for goods 

received, even though the dairy lacked a license and thus should 

not have been in business. In New York, “[a]s a general rule 

also, forfeitures by operation of law are disfavored, particularly 

where a defaulting party seeks to raise illegality as ‘a sword for 

personal gain rather than as a shield for the public good.’” Lloyd 

Capital Corp. v. Pat Henchar, Inc., 603 N.E.2d 246, 248 (N.Y. 

1992), quoting from Charlebois v. J. M. Weller Associates, Inc., 531 

N.E.2d 1288, 1292 (N.Y. 1988). These cases illustrate Justice 

Holmes’s quip that there is a strong “policy of preventing people from getting other people’s property for nothing when they 

purport to be buying it.” Continental Wall Paper Co. v. Louis 

Voight & Sons Co., 212 U.S. 227, 271 (1909) (Holmes, J., dissenting). John Hancock’s taxes are a matter for it to resolve with 

the IRS; that John Hancock may have set out to take larger deductions than the law allows does not affect Hoosier Energy’s 

contractual duties.

This leaves the doctrine of “temporary commercial impracticability.” John Hancock’s principal argument on this front is 

that New York law does not recognize any such doctrine. Like 

other states, New York recognizes the doctrine of impossibility—but even then only the kind of impossibility that the parties could not have anticipated. As John Hancock describes 

things, the parties anticipated the possibility that Hoosier En- ergy, Ambac, or both might get into financial distress and provided what was to happen: if Hoosier Energy did not come up 

with better security in 60 days, John Hancock could draw on 

the credit-default swap to protect itself. When the economy 

turned sour, and the risk materialized, John Hancock tried to 

take advantage of this extra security. Yet the district court 

deemed the risk’s coming to pass as a reason why John Hancock could not draw on the security. John Hancock sees this as 

perverse, an order that defeats the parties’ bargained-for allocation of risks. The district court may have thought that economy-wide conditions justified this reallocation, but it is hard to 
Nos. 08-4030 & 08-4248 Page 7

see how an economic downturn can be alleviated by making 

contracts less reliable. Enforceable contracts are vital to economic productivity. See Simeon Djankov, Oliver Hart, Caralee 

McLiesh & Andrei Shleifer, Debt Enforcement around the World, 

116 J. Pol. Econ. 1105 (2008); Thomas Cooley, Ramon Marimon 

& Vincenzo Quadrini, Aggregate Consequences of Limited Contract 

Enforceability, 112 J. Pol. Econ. 817 (2004).

Whether Hoosier Energy’s performance was “impossible” in 

the strong sense that contract law requires depends on what its 

obligations were. John Hancock urges on us the perspective 

that, when Ambac’s credit rating slipped, Hoosier Energy had 

an option: find a new surety in 60 days, or pay Ambac the sums

to which Ambac would become entitled once it paid John Hancock. The holder of an option may not be able to take advantage, but that differs from impossibility. Suppose that Hoosier 

Energy had an in-the-money option to purchase the Indianapolis Colts by the end of December 2008, and that as a result of 

the reduced availability of credit it was unable to find a lender 

to finance the transaction. That would not make performance 

“impossible” and extend the option’s expiration, effectively giving Hoosier Energy a new option (for 2009) for free. Likewise if 

Hoosier Energy had borrowed $100 million and was obliged to 

pay the money back on October 1, 2008. That Hoosier Energy 

found itself unable to borrow money to roll over the loan would 

not excuse repayment; the “impossibility” doctrine never justifies failure to make a payment, because financial distress differs 

from impossibility. See Restatement (Second) of Contracts §261 & 

comment d.

The uranium case illustrates these propositions. Westinghouse sold uranium on long-term requirements contracts at 

fixed prices, thus assuming the risk that market prices would 

rise (and it would lose money). Westinghouse anticipated that 

market prices would fall; its customers thought they would rise, 

or at least wanted protection against higher prices. And rise 

they did, partly as a result of a cartel. Westinghouse had neglected to protect its position in futures markets or through 

long-term forward contracts. Faced with large losses if it had to 

buy uranium on the spot market and resell to customers at 

lower prices, Westinghouse contended that the unanticipated 

spike in uranium prices made its performance impossible. The 

argument failed; the court observed that Westinghouse and its 

customers had negotiated over the risk of higher prices for ura-
Nos. 08-4030 & 08-4248 Page 8

nium, and that the occurrence of the risk did not excuse one 

side’s performance. Even if the losses drove Westinghouse into 

bankruptcy, that would not make performance “impossible”; it 

would just assure that all of Westinghouse’s creditors received 

equal treatment. See In re Westinghouse Electric Corp. Uranium 

Contracts Litigation, 563 F.2d 992 (10th Cir. 1977); Richard A. 

Posner & Andrew M. Rosenfield, Impossibility and Related Doctrines of Contract Law: An Economic Analysis, 6 J. Legal Studies 83 

(1977).

Much the same can be said about Hoosier Energy. If keeping its promise to Ambac drives it into bankruptcy, this ensures 

equal treatment of its creditors. It is hard to see why Hoosier 

Energy should be able to stiff John Hancock or Ambac, while

paying 100¢ on the dollar to all of its other trading partners, 

just because the very risk specified in the contracts between 

Hoosier Energy and John Hancock has occurred. Hoosier Energy did not expect an economic downturn, but Westinghouse 

did not expect an international uranium cartel. Downturns and 

cartels are types of things that happen, and against which contracts can be designed. When they do happen, the contractual 

risk allocation must be enforced rather than set aside. The district court called the credit crunch of 2008 a “once-in-acentury” event. That’s an overstatement (the Great Depression 

occurred within the last 100 years, and the 20th Century also 

saw financial crunches in 1973 and 1987), and also irrelevant. An 

insurer that sells hurricane or flood insurance against a “once in 

a century” catastrophe, or earthquake insurance in a city that 

rarely experiences tremblors, can’t refuse to pay on the ground 

that, when a natural event devastates a city, its very improbability makes the contract unenforceable.

We postponed discussing New York law until the general points of contract doctrine had been set out. New York law is 

consistent with what we have said; indeed, New York takes a 

very dim view of “impossibility” defenses and has never suggested that, when an impossibility defense is unavailable, a 

“temporary commercial impracticability” defense might serve 

instead. New York courts refuse to excuse performance where 

difficulty “is occasioned only by financial difficulty or economic 

hardship, even to the extent of insolvency or bankruptcy.” 407 

East 61st Garage, Inc. v. Savoy Fifth Avenue Corp., 244 N.E.2d 37, 

41 (N.Y. 1968). This applies to financial instruments—and, although impossibility might allow a party to suspend its obliga-
Nos. 08-4030 & 08-4248 Page 9

tions under a financial swap contract, this means more than a 

short-term inability to pay money. General Electric Co. v. Metals 

Resources Group Ltd., 741 N.Y.S.2d 218 (App. Div. 2002). For its 

part, Hoosier Energy all but ignores New York law; its brief 

cites only a single decision, by a trial court; appellate decisions 

go unmentioned. And the trial-court decision that Hoosier Energy cites speaks of temporary impossibility, not “temporary 

commercial impracticability.”

All of this assumes, however, that John Hancock is right to

characterize Hoosier Energy as having an option to find a better surety. As Hoosier Energy understands the contract, however, it had a duty to find a better surety, and failure to perform 

this duty was the default allowing John Hancock to draw on the 

swap. Then it might be possible to make out a real impossibility 

defense, meaning that (a) all parties to the transaction assumed, 

when they negotiated the terms, that it would be possible to 

find some other intermediary with adequate credit standing, and 

(b) as a result of a financial crisis, no such intermediary existed 

in late 2008, no matter how much Hoosier Energy offered to 

post in liquid assets to secure its obligations.

Even this would be a difficult defense to make out under 

New York law. The leading New York case on impossibility, 

Kel Kim Corp. v. Central Markets, Inc., 519 N.E.2d 295 (N.Y. 

1987), says that the defense works only if some unexpected 

event upsets all parties’ expectations; it is not enough that the 

unexpected event puts one side in a bind. The lessee of a roller 

skating rink was required by contract to obtain liability insurance, which it got and maintained six years before the insurer 

declined to renew. When the policy expired, the lessor asserted 

default, and the lessee sought a declaration that performance 

was excused by impossibility, because no insurer would under- write a liability policy for a roller rink at any price. Rejecting 

the lessee's argument, the Court of Appeals stated that impossibility can excuse performance only if the new event “could not 

have been foreseen or guarded against” in the contract. Financial distress could be and was foreseen; that’s what the creditdefault swap is all about. But if no one could have foreseen the 

extent of the credit crunch in 2008—and if it really made performance impossible, a subject on which the parties profoundly 

disagree—then the sort of argument that Hoosier Energy 

makes could satisfy the requirements of Kel Kim.
Nos. 08-4030 & 08-4248 Page 10

We have said enough to show that there is uncertainty 

about how this suit comes out under New York law. It is uncertain whether Hoosier Energy had a duty to replace Ambac, 

or just an option; the impossibility defense is unavailable if the 

option characterization is correct. (We have avoided quoting 

the documents; some portions of these lengthy contracts support each side’s characterization of them.) It is uncertain 

whether the extent of the 2008 credit crunch, which extended 

into 2009, was foreseeable. It is uncertain whether Hoosier Energy could have replaced Ambac by offering more, or better, 

security to another intermediary. Hoosier Energy undermined 

its own position in the litigation by telling John Hancock that 

it was negotiating with Berkshire Hathaway and could strike a 

deal with just a little more time, which implies that replacing 

Ambac was not impossible, but John Hancock returned the favor by suggesting that this deal was just pie in the sky and that 

Hoosier Energy would not or could not ever replace Ambac—

and, if “could not” is the right understanding, perhaps performance was impossible after all.

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.

But what was impossible in fall 2008 may well be possible in 

fall 2009. What is more, the longer this impasse continues, the 

more the balance of equities tilts in favor of John Hancock. Recall that the reason for the credit-default swap was concern that 

the Merom station would eventually become non-economic because of changes in the market for electricity, the regulation of 

emissions from coal-fired stations, or the advancing age of the plant. The more time passes, the more serious this risk—and 

the greater the risk that one or another problem may afflict 

Hoosier Energy as a firm. 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.

John Hancock is entitled to the security it negotiated 

against these possible outcomes. The injunction bonds, at only 
Nos. 08-4030 & 08-4248 Page 11

$22 million in liquid security, do not cover John Hancock’s exposure. The change in Ambac’s credit rating, in particular, requires the district court to take a new look at the adequacy of 

the Rule 65(c) security promptly after receiving this court’s 

mandate (which will be issued together with this opinion). So 

although we affirm the district court’s preliminary injunction, 

we conclude that, if Hoosier Energy has not produced a replacement for Ambac by the end of 2009, the time will have 

arrived when the court must let John Hancock realize on 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.

AFFIRMED