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CHASE MANHATTAN BANK v. TRAFFIC STREAM

February 2, 2000

THE CHASE MANHATTAN BANK, AS INDENTURE TRUSTEE, UNDER THE INDENTURE, DATED AS OF MAY 6, 1998, PLAINTIFF,
V.
TRAFFIC STREAM (BVI) INFRASTRUCTURE LIMITED, DEFENDANT.



The opinion of the court was delivered by: Scheindlin, District Judge.

  OPINION AND ORDER

This is a diversity contract action arising out of a high-yield debt instrument. On May 6, 1998, plaintiff Chase Manhattan Bank ("Chase"), acting as Trustee, and defendant Traffic Stream (BVI) Infrastructure Limited ("Traffic Stream") entered into an Indenture Agreement (the "Indenture") pursuant to which defendant issued 14¼ percent Senior Secured Notes (the "Notes") in an aggregate amount of $119,000,000 to various holders. Traffic Stream issued the Notes to finance a business venture involving the construction of toll roads in the People's Republic of China ("China").

On June 4, 1999, plaintiff commenced this litigation contending that Traffic Stream defaulted on its obligations under the Indenture. Plaintiff seeks, among other things, immediate repayment of defendant's indebtedness including both principal and interest. Plaintiff now moves for summary judgment pursuant to Federal Rule of Civil Procedure 56.

In its opposition to plaintiff's motion, defendant admits that it defaulted on its obligations under the Indenture. However, defendant argues that its defaults should be excused pursuant to the contract doctrine of "impossibility of performance." Specifically, defendant contends that a change in Chinese policy delayed defendant's recoupment of monies from the toll-road projects, making it "impossible" for defendant to fulfill its payment obligations under the Indenture.

There is no dispute that defendant defaulted on its obligations under the Indenture. Accordingly, the sole issue with respect to summary judgment is whether defendant can, as a matter of law, plausibly maintain an impossibility defense. Because I find that defendant cannot maintain such a defense, and for the reasons set forth below, plaintiff's motion is granted in its entirety.

I. Jurisdiction

The Court has diversity jurisdiction over this dispute pursuant to 28 U.S.C. § 1332 because plaintiff is a corporate citizen of New York, defendant is a corporate citizen of the British Virgin Islands and the matter in controversy exceeds $75,000. Complaint ¶¶ 1-3; Amended Answer ¶¶ 1,3. Moreover, pursuant to section 112 of the Indenture, Traffic Stream explicitly consents to the personal jurisdiction of this Court over "any, suit, action or proceeding . . . brought in connection with th[e] Indenture or the Notes." Indenture, Ex. A to 10/6/99 Affidavit of plaintiff's counsel Sarah Reid ("Reid Aff."), § 112(a).*fn1

II. Background

The following facts are taken from the parties' Rule 56.1 statements and supporting affidavits. Unless otherwise indicated, the facts are undisputed.

A. Traffic Stream

Traffic Stream is a corporation organized under the laws of the British Virgin Islands. Plaintiff's Rule 56.1 Statement of Undisputed Facts ("Pl.56.1") ¶ 2. Traffic Stream is the parent of four wholly-owned subsidiaries. Id. ¶ 4. All four subsidiaries are incorporated in Hong Kong (collectively, the "Hong Kong Subsidiaries"). Id. According to defendant, the Hong Kong Subsidiaries are its sole assets and its sole source of income. Defendant's Rule 56.1 Statement of Undisputed Facts ("Def.56.1") ¶ 45.*fn2

Through its Hong Kong Subsidiaries, Traffic Stream owns interests in thirteen Chinese-foreign cooperative joint ventures (the "Joint Ventures"). Pl. 56.1 ¶ 3. Each Joint Venture is comprised of a foreign partner — one of the Hong Kong Subsidiaries — and a Chinese partner. Def. 56.1 ¶ 48. The Joint Ventures are engaged in the development, construction and operation of six toll-road projects in China. Pl. 56.1 ¶ 3; Def. 56.1 ¶ 44.

B. The Indenture

In order to finance the Chinese toll-road projects, Traffic Stream entered into the Indenture with Chase. 11/1/99 Declaration of Wong Kwok Choi, Executive Director of Traffic Stream, ("Wong Decl.") ¶ 4. As set forth above, pursuant to the Indenture, Traffic Stream issued 14¼ percent Notes in an aggregate amount of $119,000,000. Pl. 56.1 ¶ 5. The Notes are due in 2006. Id.

Under the terms of the Indenture, Traffic Stream is required to make semi-annual interest payments on the Notes. Id. ¶ 7. The payments are due in May and November of each year, commencing in November 1998. Id.

As collateral for Traffic Stream's payment obligations, the Indenture grants Chase first priority security interests in four accounts maintained by defendant: (i) the Debt Service Reserve Account; (ii) the Construction Funding Account; (iii) the Joint Venture Distribution Account; and (iv) the Note Redemption Account (collectively, the "Collateral Accounts"). Id. ¶¶ 7-9. In addition, Traffic Stream executed a Letter of Credit Procurement and Deposit Agreement ("LOC and Deposit Agreement") pursuant to which Traffic Stream promised to deliver a letter of credit in the amount of $8,058,750 to Chase by January 6, 1999.*fn3 Id. ¶ 14; LOC and Deposit Agreement, Ex. B to Reid Aff., § 1. Traffic Stream further promised to replace the letter of credit with cash currency on or before May 6, 1999, by depositing $8,058,750 into the Construction Funding Account. Pl. 56.1 ¶ 15.

Section 501 of the Indenture explicitly states that any failure by defendant to make timely interest payments or to procure the required letter of credit constitutes an "Event of Default". Section 501 provides, in relevant part, as follows:

"Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest, including Additional Interest, if any, and Additional Amounts, if any, in respect of interest on any Note when it becomes due and payable and continuance of such default for a period of five Business Days; or
(4) the failure to deliver to the Trustee the [letter of credit] on or before January 6, 1999 as provided in the LOC and Deposit Agreement (unless the [cash] Deposit shall have been made on or before January 6, 1999). . . .

Indenture, Ex. A to Reid Aff., § 501(1),(4). The failure to pay "the principal of or premium, if any, on any Note when it becomes due and payable at its Stated Maturity, or the failure to redeem Notes in the required principal amounts on any Mandatory Redemption Date" is also an Event of Default under section 501. Id. § 501(2).

Pursuant to section 502 of the Indenture, if an Event of Default occurs, Chase, as Trustee, or the Note holders may "declare the principal of, premium, if any, and accrued interest on all of the Outstanding Notes immediately due and payable, and upon any such declaration all such amounts payable in respect of the Notes shall become immediately due and payable." Id. § 502.*fn4 The Indenture further provides that if defendant defaults upon the payment of interest, principal or premium, the defendant must, upon demand by plaintiff, pay the whole amount due plus "such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel." Id. § 503.

Finally, section 1009 of the Indenture requires defendant to provide the Trustee with a variety of financial statements and reports. Id. § 1009.

C. Traffic Stream's Defaults Under the Indenture

Traffic Stream timely tendered the first required interest payment on November 1, 1998. Pl. 56.1 ¶ 22. Since that time, however, Traffic Stream has committed multiple defaults under the Indenture.

1. Failure to Deliver Letter of Credit

Traffic Stream failed to deliver the required $8,058,750 letter of credit to Chase by January 6, 1999. Id. ¶ 24. Such failure constitutes an Event of Default under section 501(4) of the Indenture. Id.; Def. 56.1 ¶ 24; Indenture, Ex. A to Reid Aff., § 501(4).*fn5

2. Failure to Pay Accelerated Principal

On March 24, 1999, holders of more than 25 percent of the Notes delivered to defendant a Declaration of Acceleration (the "Declaration") pursuant to section 502 of the Indenture. Pl. 56.1 ¶ 26. As a result of the Declaration, the Notes became immediately due and payable. The Declaration also demanded, pursuant to section 503, "the immediate payment in full" of the Notes. Id. ¶ 27. Despite the acceleration of the Notes and the demand for immediate payment, defendant has failed to pay any amounts on the Notes. Id. ¶ 27; Def. 56.1 ¶ 27. Such failure constitutes an Event of Default under section 501(2) of the Indenture. Pl. 56.1 ¶ 28; Def. 56.1 ¶ 28; Indenture, Ex. A to Reid Aff., § 501(2).

3. Failure to Pay Interest and Provide Reports

Not only did Traffic Stream fail to honor the holders' demand for "immediate payment in full", it also failed to tender the May 1999 interest payment, which was required even in the absence of the acceleration and demand for payment. Pl. 56.1 ¶ 30. Defendant's failure to make the scheduled interest payment constitutes an Event of Default under section 501(1) of the Indenture. Id.; Def. 56.1 ¶ 28; Indenture, Ex. A to Reid Aff., § 501(1).*fn6

Finally, Traffic Stream failed to provide certain financial statements and reports to the Trustee as required under section 1009 of the Indenture. Pl. 56.1 ¶ 32.

D. Procedural History

In response to defendant's defaults, Chase commenced the instant action on June 4, 1999.*fn7 The complaint sets forth five claims: (i) breach of contract; (ii) replevin of collateral; (iii) specific enforcement of defendant's reporting obligations; (iv) an accounting; and (v) recovery of costs for collection. Complaint ¶¶ 32-52. With respect to claims one and two, Chase seeks turnover of the Collateral Accounts as well as damages in the form of a deficiency judgment equal to the difference in value between the Collateral Accounts and the total amount of defendant's indebtedness.*fn8 Id. ¶ 52.

Traffic Stream concedes that it is in default under the Indenture as a result of its failure to post the required letter of credit and its failure to make the required payments. Def. 56.1 ¶¶ 24, 27-28. However, Traffic Stream asserts the legal defense of impossibility with respect to claims one and two — breach of contract and replevin of collateral. Id. ¶ 37. Traffic Stream does not assert any legal defenses in connection with Chase's claims for specific performance, an accounting or collection costs. Id.

E. Chinese Law and The SAFE Notice

Defendant's impossibility defense to Chase's claims for breach of contract and replevin of collateral is based on an alleged change in Chinese policy regarding remittance of guaranteed funds to foreign investors. According to defendant, the alleged policy change occurred in September 1998.*fn9

1. The Joint Ventures

The contracts governing the Joint Ventures guarantee the Hong Kong Subsidiaries, as foreign partners, a fixed annual return on their investments in the toll-road projects. Def. 56.1 ¶ 47; Wong Decl. ¶ 3. If the income generated by a Joint Venture (the "Operating Income") is less than the fixed annual rate of return, the Chinese partner is obligated to pay the difference to the foreign partner from its own funds (the "Guaranteed Income"). Def. 56.1 ¶ 48; Wong Decl. ¶ 3. According to defendant, the fixed annual rate of return is sufficient to cover all interest payments due under the Indenture. Wong Decl. ¶ 5.

2. Remittance of Income

Distribution of funds from the Joint Ventures to their foreign partners is regulated by Chinese law. Def. 56.1 ΒΆ 47; Jingtian Associates Opinion Re: Guarantee of Foreign Party's Investment Return ("Jingtian Op."), Ex. A to ...


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