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Note: HF Chlor-Alkali, LLC (Manufacturer) was formed to build and operate a manufacturing facility producing hydrochloric acid, caustic soda, and bleach. Cargill, Inc. (Financier) helped Manufacturer secure USD 80,000,000.00 in bond financing through the Iowa Finance Authority of the U.S. State of Iowa. As part of the bond financing agreement (Bond Financing Agreement), U.S. Bank (Issuer) issued a standby letter of credit in favor of the bond trustee (Indenture Trustee) acting on behalf of the bond holders.

To assure Issuer under the letter of credit, Financier agreed to purchase Issuer’s rights and obligations under the Reimbursement Agreement if Manufacturer defaulted (Put Agreement). Manufacturer also obtained over USD 52,000,000.00 in financing from Cargill Financial Services International, Inc., Financier’s subsidiary, through a Prepayment Agreement. Additionally, Financier agreed to purchase all caustic soda and hydrochloric acid produced by Manufacturer’s facility (Chemical Supply Agreement) and Manufacturer/Applicant would supply Manufacturer with salt (Salt Agreement).

In August 2013, construction started on the plant, but was later stalled. The parties disputed whether the delay was due to damage from a tornado or the negligent conduct of Manufacturer’s contractors. In response, Manufacturer allegedly attempted to speed up progress; however, Financer argued the speed up never took place because the plant was still operating significantly under capacity. Further setbacks took place in the following months, which included spillage and leakage of hydrochloric acid and vapor.

Setbacks at the plant led to Manufacturer’s financial difficulties. On 1 March 2016, Manufacturer failed to pay a bond interest payment and its quarterly fees due to Issuer. In response, Issuer declared that Manufacturer defaulted, causing Indenture Trustee to draw on the entire letter of credit. Issuer honored the drawing, and paid USD 80,051,125.68. On 21 July 2016, Financier reimbursed Issuer USD 81,447,000.12. Financier then claimed that Manufacturer owed Financier in excess of USD 81,447,000.12, and sued for enforcement of the contract. Financier further alleged that Manufacturer had defaulted under the Prepayment Agreement for failing to make a principal payment in June and the quarterly interest payments in December, March, and June. In response, Financer sued for USD 51,776,432.21 under Prepayment Agreement.

On 25 July 2016, Financier sued Manufacturer in the U.S. State of Minnesota for breach of contract under the Reimbursement Agreement and Prepayment Agreements and for unjust enrichment under the Prepayment Agreement. Financier moved for a preliminary injunction requesting the appointment of a receiver. The United States District Court for the District of Minnesota, Doty, J., denied Financer’s motion for the preliminary injunction.

The Judge weighed four factors to determine whether it should appoint a receiver: (1) the likelihood of Financier’s ultimate success on the merits; (2) the threat of irreparable harm to Financier in the absence of relief; (3) the balance between the harm alleged and the harm that the relief may cause Manufacturer, and (4) the public interest. No single factor could establish the need for the injunction, so the court balanced all four factors in coming to its decision. The opinion stated that, “A preliminary injunction is an extraordinary remedy,” which left the burden on Financer to show that the preliminary injunction was necessary.

Manufacturer provided affidavits stating that Financer contributed to the default under the letter of credit by failing to fulfill their obligations under the Chemical Supply Agreement and Salt Agreement. Manufacturer argued that breaches under the two agreements impeded its ability to fulfill its obligations under the letter of credit. Furthermore, Manufacturer understood the letter of credit and the Prepayment Agreement included a provision (force majeure provision) that allowed Manufacturer to escape liability because of unforeseen events. It argued that the damage done by the tornado should have triggered that provision. These arguments were persuasive in creating doubt over Financer’s likelihood of success in the case.

The Judge concluded that Financer had failed to successfully refute these arguments. Financer provided evidence that it was not in arrears under the Chemical Supply Agreement and Salt Agreement, but the opinion stated that this evidence was insufficient to show that Financer had not previously breached their agreement. Furthermore, Financer did not address Manufacturer’s contention that the force majeure provision was triggered in the Prepayment Agreement. On these two issues, Financer failed to establish that it had a likelihood of success on the merits.

Financer also did not provide persuasive evidence that irreparable harm would occur without the issuance of an injunction. Financer argued that Manufacturer would continue to mismanage their operation, which would lead to a decrease in value. However, Manufacturer maintained that the facility was close to running at full capacity, and the court remained skeptical that money damages would not be sufficient to remedy the injury. In absence of a preliminary injunction, Financer described the harm it would suffer as “potential." Characterizing the harm in this manner failed to shift the balance of harms in the Financer’s favor, because the harm must be immediate and irreparable to establish the need for a preliminary injunction.

Lastly, Financer failed to show that it was in public interest to enforce the contract. The Judge generally accepted that enforcement of contracts is favored by public policy, but Financer may have impacted the performance of the contract by breaching the Chemical Supply Agreement and Salt Agreement. After balancing the arguments, the court rejected Financer’s motion for a preliminary injunction.

[AWL/JMC]

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