The opinion of the court was delivered by: Scheindlin, District Judge.
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
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.
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
The following facts are taken from the parties' Rule 56.1
statements and supporting affidavits. Unless otherwise indicated,
the facts are undisputed.
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")
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.
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
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.,
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.,
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.
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
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.
Distribution of funds from the Joint Ventures to their foreign
partners is regulated by Chinese law. Def. 56.1 ¶ 47; Jingtian
Associates Opinion Re: Guarantee of Foreign Party's Investment
Return ("Jingtian Op."), Ex. A to ...