                                   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 Hoo-
sier Energy’s deductions to John Hancock. They entered into a
leveraged lease: John Hancock paid Hoosier Energy $300 mil-
lion 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 Han-
cock 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 Hoo-
sier 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 En-
ergy’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 transac-
tion 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 En-
ergy more than it was willing to pay, as John Hancock believes,
is a subject that remains in dispute. When the extended dead-
line 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 Am-
bac 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 in-
junction 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 Interna-
tional, 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 Han-
cock 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 En-
ergy 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 inter-
locutory 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 Hoo-
sier Energy have in whether Ambac performs under a contract
that, the parties agreed, would be deemed independent of Hoo-
sier 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 En-
vironment, 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 in-
dependent 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 immedi-
ate, 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 def-
erential at the preliminary injunction stage, and we lack an ade-
quate basis on which to disagree with the district court’s as-
sessment. 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 con-
tinuing ability to perform and the injunction bonds posted un-
der 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 al-
low 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 im-
proved 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 con-
tract 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 peo-
ple 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., dissent-
ing). John Hancock’s taxes are a matter for it to resolve with
the IRS; that John Hancock may have set out to take larger de-
ductions than the law allows does not affect Hoosier Energy’s
contractual duties.
    This leaves the doctrine of “temporary commercial imprac-
ticability.” 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 impossibil-
ity—but even then only the kind of impossibility that the par-
ties 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 pro-
vided 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 Han-
cock could not draw on the security. John Hancock sees this as
perverse, an order that defeats the parties’ bargained-for alloca-
tion of risks. The district court may have thought that econ-
omy-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 eco-
nomic 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 Han-
cock. The holder of an option may not be able to take advan-
tage, but that differs from impossibility. Suppose that Hoosier
Energy had an in-the-money option to purchase the Indianapo-
lis 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 giv-
ing 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 justi-
fies 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. Westing-
house 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 ne-
glected 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 Doc-
trines of Contract Law: An Economic Analysis, 6 J. Legal Studies 83
(1977).
    Much the same can be said about Hoosier Energy. If keep-
ing 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 En-
ergy 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 con-
tracts can be designed. When they do happen, the contractual
risk allocation must be enforced rather than set aside. The dis-
trict court called the credit crunch of 2008 a “once-in-a-
century” 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 improbabil-
ity 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 sug-
gested 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, al-
though 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 En-
ergy 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 bet-
ter surety. As Hoosier Energy understands the contract, how-
ever, 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 insur-
ance, 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 impos-
sibility can excuse performance only if the new event “could not
have been foreseen or guarded against” in the contract. Finan-
cial distress could be and was foreseen; that’s what the credit-
default swap is all about. But if no one could have foreseen the
extent of the credit crunch in 2008—and if it really made per-
formance 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 un-
certain 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 sup-
port 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 En-
ergy 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 fa-
vor 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 perform-
ance 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 interlocu-
tory 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. Re-
call that the reason for the credit-default swap was concern that
the Merom station would eventually become non-economic be-
cause 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 de-
sirable as a swap partner; while this appeal has been under ad-
visement, 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 ex-
posure. The change in Ambac’s credit rating, in particular, re-
quires 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 re-
placement 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 di-
rection of permanence.
                                                       AFFIRMED
