Debevoise Scores for N.Y. Fed in AIG Takeover Case

Maurice “Hank” Greenberg’s bold, two-pronged attack on the federal government took a big hit on Friday, when a judge tossed claims that the New York Federal Reserve Bank trampled on the rights of American International Group Inc. shareholders during the $85 billion AIG bailout. But the former AIG chairman and his lawyers at Boies, Schiller & Flexner aren’t defeated yet.

In an 89-page decision, U.S. District Judge Paul Engelmayer in Manhattan dismissed the breach of fiduciary duty case that Greenberg’s company, Starr International USA, brought against the NYFRB last year. Siding with the NYFRB’s lawyers at Debevoise & Plimpton, the judge ruled that Starr’s claims are meritless because NYFBR didn’t owe a fiduciary duty to AIG shareholders in the first place.

Greenberg, who was ousted from AIG in 2005, hired legal heavyweight David Boies of Boies Schiller in 2011 to sue the N.Y. Fed over its handling of the AIG takeover. He brought the case through Starr, which owns a 12 percent stake in AIG. Greenberg alleged that the NYFRB preyed on the insurance giant like a “loan shark,” charging 14 percent interest on its $85 billion loan to AIG in September 2008 and seizing 80 percent of the company until the loan was repaid. Once in control of AIG, Starr alleged, the NYFRB used its assets to provide “backdoor bailouts” to Goldman Sachs and other companies. In addition to suing the NYFRB in New York, Starr brought constitutional claims against the U.S. government in U.S. Court of Federal Claims in Washington, D.C, alleging $25 billion in damages.

Boies faced an uphill battle turning his client’s grievances into plausible claims for breach of fiduciary duty. For one thing, Starr didn’t sue until November 2011, so claims relating to the alleged unfairness of the September 2008 loan were barred by a three-year statute of limitations. Boies had no choice but to focus on the NYFRB’s post-takeover conduct, like its decision in 2009 to pressure AIG to sell assets to investment banks like Goldman Sachs at par value. According to Starr, AIG’s board could have negotiated better deals with the investment banks, but the NYFRB wanted to use AIG’s assets to prop up Wall Street.

Another challenge for Boies was that in order to plead that the NYFRB had a fiduciary duty to AIG shareholders, he first had to prove that the NYFRB had de facto control over AIG. At a three-hour oral argument in July, he presented a slew of reasons why AIG was at NYFRB’s mercy. Then-NYFRB chairman Timothy Geithner had already said publicly that AIG wouldn’t get a government bailout, so AIG’s board members felt it had no choice but to accept the takeover, Boies argued. And if they opted instead to take AIG into bankruptcy, they would surely become prime scapegoats for the financial crisis, he added.

Those arguments got nowhere with Engelmayer. “Far from describing actual control of AIG by an outside party, these allegations describe a moment of corporate desperation,” the judge ruled. “[I]n September 2008, AIG was in extremes, and its independent board of directors, to save the company, voluntarily accepted the hard terms offered by the one and only rescuer that stood between it and bankruptcy — FRBNY.”

Engelmayer added that even if Starr could establish fiduciary duty, its breach of fiduciary duty claims are preempted by federal statutes entrusting Federal Reserve Banks with averting financial collapse. “[W]here imposing state-law duties upon a federal instrumentality would squarely conflict with its federal responsibilities, as would subjecting NYFRB to Delaware fiduciary duty law in connection with the terms of its serial rescues of AIG, such state law is pre-empted,” he ruled.

The decision has no impact on Starr’s separate case in Washington alleging that the government takeover of AIG violated the takings clause of the Fifth Amendment. Judge Thomas Wheeler of the U.S. Court of Federal Claims refused to dismiss that case in July. Splitting with Engelmayer, Wheeler ruled that Starr’s lawyers had at least made a colorable argument that AIG had no choice but to accept the takeover.

In a statement, Boies Schiller partner Robert Dwyer reiterated that Starr’s constitutional case is still pending. He also said that Starr is considering an appeal of Engelmayer’s ruling.

NYFRB counsel Gary Kubek of Debevoise declined to comment.

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