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Tuesday, January 06, 2009

Ind. Decisions - Still more on "Judge gives reprieve to Hoosier Energy"

The 7th Circuit heard oral argument yesterday in the case of Hoosier Energy v. John Hancock (08-4030). You can heard the argument here. See earlier ILB entries from Nov. 26, 2008, Dec. 12, 2008, and Dec. 20, 2008.

Early into yesterday's oral argument (at about 3:40), one of the 7th Circuit judges describes the purpose of yesterday's argument: "here is this complicated transaction that has taken place, and for reasons that probably have a lot to do with the credit markets, it is unraveling, and what the district court was asked to do was make sure that the litigation could go forward in a way that would best protect any number of possible outcomes ... , and so we are here to review whether, as we have now modified it, this preliminary injunction is an acceptable way to do that, was that an abuse of discretion, so I guess I'm a little worried about getting too far into the merits of the underlying deal."

The only press report I've seen on yesterday's argument, in a case of potentially tremendous implications to Hoosiers, is this one from Eoin Callan of the Financial Post. Some quotes:

Canada's largest insurer on Monday turned to a U.S. court to force a rural electricity cooperative in Indiana to make an immediate US$120-million payment under the tax avoidance scheme in a move that would force the non-profit utility into bankruptcy.

The windfall would provide Manulife with a cash injection at a time when its U.S. subsidiary, John Hancock Financial, is draining capital from the parent company because of heavy exposures to volatile financial markets and is being claimed early because of a slip in the credit rating of one of the parties to the controversial transaction.

But the aggressive move is inciting fury on Capitol Hill, where influential members of Congress say the company is exploiting a legal loop hole to claim money it is not legitimately entitled to given recent findings that the underlying tax scheme is abusive. * * *

At the heart of the fractious dispute that could jeopardize the power supply to 350,000 homes in the U.S. heartland is an opaque tax scheme that briefly gained popularity a few years ago among accountants working on behalf of insurers and banks with an appetite for risk. * * *

While Hoosier has never faltered in its commitments to Manulife under the deal, the financial guarantor -- Ambac -- has seen its credit rating downgraded amid the credit crisis along with many backers of so-called credit default swaps.

Manulife has seized on the change in the credit rating to claim a $120-million payment under the credit default swap for "early termination," allowing it to collect the tax benefits upfront.

Lawmakers and a lower Indiana court [ILB - SD Ind.] have dismissed this as a technical default given the guarantor is still backing the deal and Manulife could not reasonably expect to enjoy the tax benefits anticipated when the original deal was struck.

Hoosier argued before an appeal court [ILB - 7th Cir.] on Monday that the claim by Manulife combined "some of the worst aspects of modern finance" that "combines the sometimes toxic intricacies of credit default swaps and investment derivatives with a blatantly abusive tax shelter."

Posted by Marcia Oddi on January 6, 2009 01:05 PM
Posted to Ind Fed D.Ct. Decisions