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Media Alerts - Starr International Co., Inc. v. Federal Reserve Bank of New York and American International Group, Inc. - Second Circu
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January 29, 2014
  Starr International Co., Inc. v. Federal Reserve Bank of New York and American International Group, Inc. - Second Circu
Headline: Second Circuit Affirms Dismissal of Suit by American International Group (AIG) Shareholder against the Federal Reserve Bank of New York for Breach of Fiduciary Duty in its Rescue of AIG During the Fall 2008 Financial Crisis

Area of Law: Corporate

Issue(s) Presented: Whether state fiduciary law applies to FRBNY's rescue activities or whether it is preempted by federal common law.

Brief Summary: Starr International Co., Inc. "(Starr") appeals from a judgment of the United States District Court for the Southern District of New York, dismissing its claims against the Federal Reserve Bank of New York ("FRBNY) for breach of fiduciary duty in connection with the FRBNY's "rescue" of American International Group, Inc. ("AIG") during the financial crisis in fall 2008. In September 2008, with AIG on the brink of bankruptcy, the FRBNY offered AIG a recue arrangement that included a credit facility from FRBNY of $85 billion dollars. With no alternative, AIG accepted this deal and, on September 22, 2008, AIG and FRBNY executed the formal agreement ("the Credit Agreement) memorializing the rescue agreement. At the time of the Credit Agreement, Starr was AIG's principal shareholder.

Starr brought a suit in November 2011, alleging direct and derivative claims against FRBNY for breach of fiduciary under Delaware state law to AIG's shareholders. On November 16, 2012, the District Court granted FRBNY's motion to dismiss, finding that Starr did not adequately plead that FRBNY was a fiduciary to AIG under Delaware law and that, because FRBNY is a federal instrumentality charged with preserving the stability of the national economy, Delaware fiduciary law was preempted by federal common law and thus did not apply to the challenged actions. The Second Circuit affirmed, agreeing that these state law claims were preempted by federal law common. The court reasoned that an application of Delaware fiduciary duty to FRBNY's rescue activities would be inconsistent with FRBNY's mandate under federal law to adequately protect the federal interests at stake in stabilizing the national economy.

To read the full opinion please visit
http://www.ca2.uscourts.gov/de.../1/doc/12-5022_opn.pdf - xml=http://www.ca2.uscourts.gov/decisions/isysquery/ca3ce68c-8e2e-461a-8f6f-00e5450b4aae/1/hilite/

Extended Summary: On September 16, 2008, when AIG informed the federal government that it might have to file for bankruptcy, the FRBNY offered AIG a rescue arrangement that included a credit facility from FRBNY of $85 billion at an initial interest rate of 14.5%, but required AIG to give the federal government approximately 80% interest in AIG common stock to be held in a trust (the "Trust"). With no other alternatives, AIG accepted this deal and on September 18, AIG's directors replaced the company's existing CEO with Edward Liddy, who Starr alleges to have been under the control of FRBNY and thereby not acting solely in the interests of AIG's shareholders. September 22, 2008, AIG and FRBNY executed the formal agreement ("the Credit Agreement) memorializing the rescue agreement. At the time of the agreement, Starr was AIG's principal shareholder.

Starr brought a suit in the United States District Court for the Southern District of New York in November 2011, alleging direct and derivative claims against FRBNY for breach of fiduciary duty and for aiding and abetting AIG's officers in breaching their fiduciary duties, as well as other constitutional issues that are not at issue in this appeal. Starr claimed that in November and December 2008, FRBNY caused a special vehicle called Maiden Lane III, funded by both AIG and FRBNY, to be used to purchase $62 billion in assets from AIG credit default swap counterparties at full par value. Starr alleges that Maiden Lane III effectively provided the counterparties with "backdoor bailouts" - to the detriment of AIG - because many of the counterparties would have been willing to settle AIG's obligations for less than par value. Additionally, Starr challenged FRBNY's actions involving the Trust. On March 4, 2009, AIG issued the required Series C Preferred Stock to the Trust. Starr contends that the FRBNY circumvented a stockholder vote rejecting a proposal to increase the number of common stock shares through a 20:1 reverse stock split. In November 2012, the District Court granted FRBNY's motion to dismiss Starr's complaint on the grounds that: (1) Starr had not adequately plead that FRBNY was a fiduciary to AIG under Delaware law; and (2) Delaware fiduciary duty law was preempted by federal common law and could not apply to the challenged actions by FRBNY which were performed as a federal instrumentality charged with preserving the stability of the national economy. Starr filed a timely appeal of the dismissal.

The Second Circuit first reviewed that the FRBNY, as one of the twelve regional reserve banks, is a fiscal agent of the United States and is operated not for shareholders profit but, rather, was created and are operated in furtherance of national fiscal policy. Because Federal Reserve banks "conduct important governmental functions regarding" matters including the "general fiscal duties of the United States," they are "instrumentalities of the federal government." FRBNY contended that the emergency rescue activities at issue fell within its statutory authority under Section 13(3) of the Federal Reserve Act to provide discretionary emergency loans to entities such as AIG in "unusual and exigent circumstances" when such entities are "unable to secure adequate credit accommodations from other banking institutions." Starr argued that the FRBNY's challenged rescue activities went beyond the lawful scope of authority granted by the Federal Reserve Act and, accordingly, could be subject to state breach of fiduciary duty claims.

The Second Circuit affirmed the dismissal of Starr's claims, agreeing with the District Court that Delaware fiduciary law did not apply to FRBNY's rescue activities. The Court emphasized that Starr had failed to identify any case limiting the scope of preemption to the federal instrumentality's lawful operation, or making state law inherently available to police excesses of authority by federal actors. The Court further reasoned that application of Delaware fiduciary duty law to FRBNY's rescue activities in this case - which would impose a primary duty to act on the interests of FRBNY's shareholders - would be in direct conflict with FRBNY's duty under federal statute and federal common law to adequately protect of the federal interests at stake in stabilizing the national economy.

To read the full opinion please visit
http://www.ca2.uscourts.gov/de.../1/doc/12-5022_opn.pdf - xml=http://www.ca2.uscourts.gov/decisions/isysquery/ca3ce68c-8e2e-461a-8f6f-00e5450b4aae/1/hilite/

Panel: Circuit Judges Walker, Jr., Livingston, and Chin

Argument: 09/17/2013

Date of Issued Opinion: 01/29/2014

Docket Number: No. 12-5022-cv

Decided: Affirmed

Case Alert Author: Andrea Hlopko

Counsel: David Boies, Boies, Schiller & Flexner LLP, Armonk, NY (Robert J. Dwyer, Boies, Schiller & Flexner LLP, New York, NY and John L. Gardiner for Skadden, Arps, Slate, Meahher & Flom, LLP, New York, NY on the brief), for Plaintiff-Appellant.

John S. Kiernan, Debevoise & Plimpton LLP, New York, NY (Gary W. Kubek, Jennifer E. Spain, Nicholas C. Tompkins, David B. Noland, Thomas C. Baxter, Jr., Shari Leventhal, and Meghan McCurdy, Federal Reserve Bank of New York on the brief) for Defendant-Appellee.
Joseph S. Allerhand, Weil, Gotshal & Manges LLP, New York, NY (Stephan A. Radin and Jamie L. Hoxie on the brief), for Nominal Defendant-Appellee.

Author of Opinion: Circuit Judge John M. Walker, Jr.

Case Alert Supervisor: Elyse Diamond Moskowitz

    Posted By: Elyse Diamond @ 01/29/2014 04:10 PM     2nd Circuit  

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