AIG Suit: Option Panama

AIG’s board is meeting today to consider joining a suit in US courts against the US government. They may should take their case to Panama.

A bit of background before I explain this alternative option for the company.


Maurice Greenberg was AIG’s CEO for many years before the financial crisis. While there, he oversaw the establishment of an corporation that provided offshore pension services to the company, Starr International Co., now registered in Panama. Greenberg remained a major shareholder in AIG after leaving, maintaining his holdings through Starr. In 2009, Greenberg used the Panama company to launch an attack on AIG,  who in turn sued the US government over Starr-related tax avoidance issues. (I documented some of this brouhaha in a 2009 report.)

In 2011, Greenberg took the unusual step of launching twin claims in New York and DC courts, claiming that the Bush administration’s 2008 bailout of AIG violated various contractual and constitutional protections. Today, he’s trying to convince AIG itself to join the fun. Members of Congress have not been pleased with these shenanigans, either in 2009 or today.

Greenberg has been represented by superpowered attorney David Boies, who argued for Al Gore in Bush v. Gore back in 2000. His 2009 case with AIG was settled, his 2011 New York case against the Fed was dismissed, and the 2011 DC case against the Treasury Department remains stalled. (And AIG’s tax case against the government seems to have stalled out since 2010.)

Could it be that Greenberg would have better luck outside of US courts, by claiming standing as an injured “Panamanian” investor under the US-Panama trade or investment treaties?

With the bailout now over and the US Treasury being repaid at a profit, it’s worth taking a closer look at Starr’s legal arguments in the New York court ruling, and its partial success in DC of keeping the case moving forward, over the government’s repeated objections. The domestic US judges tended to be more deferential than I imagine international arbitrators would be.


First, let’s look at the New York decision from November 2012, which was handed down by Judge Paul Engelmayer of the U.S. Southern District, NY. In that case, Starr took issue with several aspects of the Federal Reserve Bank of New York’s (FRBNY) treatment of AIG during the financial crisis.

First, over the week of September 16-22, 2008, the FRBNY and AIG’s Board of Directors agreed to a FRBNY $85 billion loan to AIG with a 14.5 percent interest rate. As Engelmayer recounts,  “The agreement also provided for AIG to issue a class of stock, Series C Preferred Stock (the “Series C shares”), which would later be convertible into 79.9% of AIG common stock. Id. ¶ 57. The Series C shares were to be issued to a trust (the “Trust”), whose sole beneficiary was the United States Treasury.”

Second, on November 25, 2008, a FRBNY-created entity (Maiden Lane III) paid $62 billion to AIG’s counterparties, who we know to be primarily foreign banks, in exchange for a range of potentially toxic, housing-related assets. ML III apparently paid full price for these assets, rather than the heavily discounted or non-existent price they would have fetched in the markets in those heady days. The proceeds from these toxic assets were transferred to the Treasury-linked trust in  March 2009.

Third, on June 30, 2009, AIG’s board made two proposals at the annual shareholding meeting. AIG’s charter capped the issuance of shares at 5 billion. But 3 billion had already been issued, which wouldn’t have allowed the government to indirectly take the 80% ownership. The first proposal, which failed to receive a majority of shareholder support, would have simply created new shares. The second, which passed (because the Treasury-linked trust got to vote for it), simply reduced the value of the extant shares, as of January 2011. This action of course riled shareholders like Greenberg.

It’s important to note that there was widespread opposition to these measures from the left and the right. A lot of observers thought that the bailout shouldn’t have happened, should have been accompanied by full nationalization (i.e. government ownership of common stock of AIG), and should not have included paying out of AIG foreign and domestic counterparties at full par value. Relatively less attention has been paid among policy-minded commentators to the June 2009 actions, as probably few people were shedding too many tears over the internal squabbles of the owners of a disaster-prone firm.


So what was Starr’s complaint about? The September 2008 events were barred from being considered by having narrowly missed the statute of limitations under Delaware law (where AIG was incorporated), so Starr had to focus its legal arguments on the post-November 2008 events. Its major claim was that the FRBNY’s actions in November 2008, June 2009 and January 2011 violated the Fed’s alleged fiduciary duty to AIG and its shareholders.

Judge Engelmayer ruled against this argument, on the grounds that the FRBNY didn’t actually control AIG, so had no fiduciary duties, and that, even if it had, federal instrumentalities get to put the public interest ahead of any alleged fiduciary obligation. He pointed to several facts. First, although AIG’s board may have felt coerced by the government in September 2008, it was the board that agreed to the deal. Second, the government was not actually a shareholder as of November 2008 (in fact, the Treasury-trust didn’t exist or have the shares until several months later). Third, Starr’s argument that the FRBNY was a controlling lender in November 2008 had no resonance with Delaware law, since only owners, not creditors, make corporate decisions.

Fourth, Starr had alleged that the FRBNY de facto controlled the June 2009 voting outcome, because the Treasury-trust’s trustees had previously worked for the Fed and their names had been put forward by the Fed. But, as Engelmayer noted,

These limited allegations fail, as a matter of law, to draw the trustees’ independence from FRBNY into question. In the analogous situation of corporate board members, “under Delaware law[,] a director’s past employment with the company on whose board he sits does not alone establish that director’s lack of independence.” In re W. Nat’l, 2000 Del. Ch. LEXIS 82 at *58 (citing Odyssey Partners v. Fleming Cos., 735 A.2d at 408); see also id. at *35 (distinguishing facts from case in which the directors were active employees of the majority shareholder). To the extent Starr’s challenge to the trustees’ independence derives from its allegation that FRBNY selected the trustees in the first place, that, too, is insufficient. Again in the analogous context of corporate directors, Delaware law is clear that “[i]t is not enough to charge that a director was nominated by or elected at the behest of those controlling the outcome of the corporate election. That is the usual way a person becomes a corporate director.” Aronson, 473 A.2d at 816; see also In re S. Peru Copper Corp. S’holder Derivative Litig., 30 A.3d 60, 69 n. 14 (Del.Ch.2011). These two circumstances thus do not give rise to a plausible claim that FRBNY exercised de facto control over the Trust.

Fifth, Starr argued that various terms of the September 2008 deal required AIG to make the June 2009 stock watering down happen, one way or another. But the judge noted that the board had freely agreed to the terms of the ’08 deal, and that, in any case, the “trust agreement” made clear that the government was not to have operational control over the AIG.

Sixth, the FRBNY benefited from a margin of judicial deference and of sovereign immunity from being sued. There was a variety of aspects to this argumentation, but I’ll just pick out one: the paying off of the AIG counterparties at full face value was justified because of the need to allow public officials wide latitude in their pursuit of the public interest. In Engelmayer’s words…

To appreciate the drag that the prospect of such liability might put on FRBNY’s pursuit of its statutory mission, one need only imagine the predicament confronting the hypothetical FRBNY officials ostensibly “controlling” AIG in late November 2008 were their actions in connection with AIG’s rescue potentially subject to state fiduciary law: “To act or not to act? Is it better to act decisively, and pay par value, and thereby end the grave threat to the economy posed by AIG’s continuing CDS exposure? Or is it better, at the risk of not helping the economy, to negotiate over price with these counterparties, and thereby avoid being found liable by a jury, years from now, for breach of Delaware fiduciary duty law?” It is to avoid distracting and detaining such federal officials—including the FRBNY personnel who in fall 2008 were the paradigmatic men and women “in the arena”33—from carrying out their vital official duties that the preemption doctrine covers federal instrumentalities. See In re Franklin Nat’l Bank, 478 F.Supp. at 222–23 (“The critical national and international ramifications of crises in the banking industry require that the initiative and imagination of the regulators not be stifled by the threat of tort actions against the United States. Congress’ grant of broad discretionary powers to banking regulators acknowledges this necessity for creativity and innovation.”).34

Engelmayer noted reams of US court precedent that explained the policy motivations for not having judges second guess the decisions of executive branch administrators. Quoting one of them…

Officials of administrative agencies possess resources and expertise unavailable to courts. Their policy decisions rest upon delicate technical and political judgment of the risks and benefits of possible courses of action. It is highly unlikely that damage actions brought in the courts will consistently produce a more desirable balancing of the competing policy considerations.

And another (related to whether suits should be allowed against coast guards that may harm a ship in a rescue operation), predicting…

the inevitable consequence on the morale and effectiveness of the Coast Guard if the conduct of its officers and personnel in the field of rescue operations under the indescribable strains, hazards and crises which attend them, is to be scrutinized, weighed in delicate balance and adjudicated by Monday-morning judicial quarterbacks functioning in an atmosphere of serenity and deliberation far from the madding crowd of tensions, immediacy and compulsions which confront the doers and not the reviewers.

Why would it have been so particularly burdensome to negotiate lower payments to AIG’s counterparties? Engelmayer posed an interesting theory: “FRBNY could reasonably conclude, in the moment, that had negotiations been undertaken with the various counterparties to obtain better terms, those negotiations would have taken time. Protracted negotiations were a particular risk to the extent that counterparties might have sought “most favored nation” status or otherwise declined to sign off on discounted terms before comparing them with the terms extended to other counterparties.”


The irony of the foregoing is pretty rich.

Critical legal scholars would argue that Delaware and corporate law have been built up to reduce liability for those that actually exercise power in society. A sociologist or political scientist would have no trouble believing that a creditor could effectively control a debtor, or that getting to nominate trustees was a form of power. The FRBNY had both of these types of power in reality, but just not in corporate law. So the same types of shields that keep corporate wrongdoers off the hook bizarrely insulated the government in the AIG bailout. This is maybe one time that pro-market folks wished they allowed coercion to be a more powerful influence on establishing liability under corporate law.

It is also especially revealing that Engelmayer worried that the US government could have been on the hook if AIG’s foreign counterparties began wanting the best deal that they could get, the “most favored nation” deal. The judge doesn’t say so, but this seems to be an indication that international trade and investment law is a reason that the US government deemed that corporations shouldn’t have to take a haircut for their own risky lending activities, as standard economics would dictate as reasonable. This has special resonance as the Obama administration continues to go after Argentina for is debts related to international investments.


While this is already a super long post, I should mention a few aspects of the DC court ruling from July 2012, where Starr challenged the government’s actions on constitutional grounds.

Most of Starr’s due process claims were thrown out, since the particular court in question (the Court of Federal Claims) only allows cases where a party feels that the government owes them money, and due process claims are not typically money mandating.

However, the takings claim was allowed to go forward.  He basically ruled against the government’s arguments that “[c]ommon stock comes with no guarantees or rights to proceeds, and share value is therefore not a protected property interest” and that “voting rights are not property for purposes of the Takings Clause.” Judge Wheeler found that stocks and voting rights could actually be taken by the government, and that the government may have even coerced AIG’s board into accepting the September 2008 deal. (Whether this will affect the outcome at later merits stages is difficult to know.)

But Wheeler wasn’t willing to all the way with Starr. He rejected the company’s claim that Starr should be awarded takings compensation on the grounds that “the conditions that the Government imposed upon AIG were disproportionate to the benefits conferred,” noting that the Supreme Court has been unwilling to use such so-called proportionality tests outside of the realm of land use policies. The judge also said that Starr couldn’t prevail on a “creeping takings” claim, but that there must be a”precise event that fixed any potential government liability.”


So, back to my speculation for this post in the first place: would any of these judicial decisions have come out differently if Starr presented itself as a Panamanian investor under the US-Panama trade or investment deals?

I think there would be a few differences as to how international arbitrators would see the case.

First, the doctrine of state responsibility in international law is pretty broad. International lawyers are quick to attribute facts existing within a state’s borders to the state, even when domestic judges easily distinguish between the manifold people and institutions existing within a domestic legal order. So while the government may not be responsible for the AIG share splitting kerfuffles under the narrow attributions of control in Delaware corporate law, the government is potentially responsible for basically everything that happens in the US as a matter of international law. So, this is an instance where inter-state law is more anti-state than corporate law.

Second, Starr would be able to get compensation for either its takings or due process claims (which correspond roughly in trade law to expropriation or fair and equitable treatment claims). As noted in my comments on the DC court case, US law does not typically allow cash compensation for due process violations, instead simply envisioning some other sort of non-pecuniary rectification. However, investment tribunals can and do award cash damages for fair and equitable treatment violations.

Third, Starr might have a better chance in investment arbitration of arguing that a set of measures constituted a “creeping expropriation”, even when any one of them on their own would not qualify as a taking.

Fourth, a proportionality test might be more likely to be used in the international context.

Fifth, Starr wouldn’t have to jump through hurdles as to how the post-crisis measures resonated in domestic law. The following Judge Wheeler’s comments illustrate the point:

In evaluating a takings claim, however, courts assume that the government conduct at issue was lawful and look to whether that action constituted a taking in violation of the Fifth Amendment. Acadia Tech., 458 F.3d at 1331; Rith Energy, Inc. v. United States, 270 F.3d 1347, 1352  (Fed.Cir.2001). Again, the Federal Circuit has been careful to distinguish between its valid exercise of jurisdiction where a plaintiff claims
the government action constituted a taking regardless of whether the action was unlawful, and its lack of jurisdiction where a plaintiff claims the government action constituted a taking because the action was unlawful. Lion Raisins, Inc. v. United States, 416 F.3d 1356, 1369 (Fed.Cir.2005) (internal citation omitted). In Lion Raisins, the plaintiff alleged that the agency action constituted a taking because the action was unlawful. Id. The Federal Circuit held that under those circumstances, the plaintiff did not have a right to litigate the issue as a takings claim but instead
should have used the mandated administrative review proceeding. Id. at 1369–70.

While Wheeler concluded that this particular distinction wouldn’t derail Starr’s claim, the recommendation to pursue administrative remedies would not even be an issue in international law, where these municipal law distinctions are held not to apply.

The main difficulties I see for Greenberg would be getting over any statute of limitations to initiating the case, and over the hurdle that he (an American citizen) doesn’t effectively control Starr, despite its Panamanian registration. The US-Panama trade deal, like most US trade deals, have provisions that allow states that are challenged to invoke denial of benefits provisions when one of their own nationals is using a corporate shell to sue them. However, Greenberg has some options here too. If he has more than a an employee or two and a record of some bills paid in Panama, that might be enough to survive challenge. In any case, if he is able to bring a case under the US-Panama investment treaty (rather than the trade deal), the former does not have the denial of benefits language.


This is all extremely speculative. And, who knows, maybe the US courts will side with Starr and thereby align domestic takings law more closely with the looser contours of international expropriation law. The distinction between the “Two Ceilings” these regimes represent does seem to collapse over time, mutually reinforcing one another.

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