John Hancock Life Insurance Co. receives lots of cash in premium payments, which it then invests so that it will have enough funds to pay claims from its policy holders. To this end, it entered into a leveraged lease with Hoosier Energy. This transaction was highly complex and only profitable because of convoluted provisions of the tax code. (You definitely do not want to try this at home.) In short, Hancock paid Hoosier $300 million to lease a power plant for 63 years, which Hoosier then leased back for 30 years. 

But Hancock foresaw some risks: What if the power station became unprofitable? What if Hoosier stopped paying rent? (What would Hancock do if it was stuck with a power plant?) To mitigate these risks, it asked to Hoosier to secure a credit-default swap (CDS). A CDS is a financial contract that acts as insurance against a loan default and other contingencies. Ambac Assurance Corporation, the CDS provider, agreed to pay Hancock if certain events occurred. One of those triggering events was a decline in Ambac’s own credit rating below a certain level. In that case, Hoosier had to find a replacement swap partner. If Hoosier was unsuccessful, Ambac would pay Hancock $120 million.

And then came 2008—and a global financial crisis. ’Ambac’s credit rating plummeted, along with pretty much everyone else’s. Hancock demanded that Hoosier find a replacement, but Hoosier stalled. If it replaced Ambac, it would have to pay big money—enough to send Hoosier into bankruptcy. So Hoosier sued, requesting an injunction to suspend its duty to find a swap partner. It claimed that the global financial crisis rendered its performance impossible—or at the very least, “temporarily impracticable” until the economy improved. The lower court sympathized with Hoosier and granted the injunction. Hancock appealed

Questions:

1. Did the global credit crisis render performance impossible?

2. What is an injunction?

3. Why didn’t the global credit crisis render performance impossible?