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Brookfield Asset Management, Inc. v. AIG Financial Products Corp.

September 29, 2010

BROOKFIELD ASSET MANAGEMENT, INC., F/K/A HEES INTERNATIONAL BANCORP INC., AND BRYSONS INTERNATIONAL, LTD., F/K/A BRYSONS INTERNATIONAL BANK, LTD., PLAINTIFFS,
v.
AIG FINANCIAL PRODUCTS CORP. AND AMERICAN INTERNATIONAL GROUP, INC., DEFENDANTS.



The opinion of the court was delivered by: Paul G. Gardephe, U.S.D.J.

MEMORANDUM OPINION & ORDER

Plaintiffs Brysons International, Ltd. and its parent Brookfield Asset Management, Inc. bring this action against Defendants AIG Financial Products Corp. ("AIGFP") and American International Group, Inc. ("AIG") seeking a declaratory judgment that an interest rate swap agreement entered into by Brysons and AIG-FP in 1990 has, under its terms, automatically terminated.

Defendants have moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons stated below, Defendants' motion to dismiss will be GRANTED in part and DENIED in part.

BACKGROUND

In 1990, Brookfield sought to borrow $200 million from AIG. (Cmplt. ¶ 13) AIG offered financing via three transactions: a sale of debentures and two "fixed for floating" interest rate swaps.*fn1 (Id.)

The first swap transaction was a "Zero-Coupon Swap," under which neither party would make a payment to the other until 2015. (Cmplt. ¶ 17) AIG-FP's payment to Brysons would be computed by compounding LIBOR every six months from the inception of the agreement until the termination date on a notional amount of $200 million. (Id.) Brysons' payment to AIG-FP would be computed by compounding a fixed rate of 9.61% every six months on the same notional amount. (Id.)

The second swap transaction was a "Coupon Swap," under which AIG-FP would pay Brysons a fixed amount calculated at an annual rate of 9.61% on $200 million every six months. (Cmplt. ¶ 18) Every five years, Brysons would pay AIG-FP an amount calculated at LIBOR on $200 million, compounded every six months. (Id.)

I. THE SWAP AGREEMENT

To document their agreement with respect to the two swap transactions, AIG-FP and Brysons entered into the Swap Agreement, dated October 18, 1990. (Cmplt. ¶ 15) The Swap Agreement includes: a confirmation setting forth the primary economic terms of the swap transactions, the 1987 International Swaps and Derivatives Association ("ISDA") Interest Rate and Currency Exchange Agreement (the "1987 ISDA Form") and the Schedule to the ISDA Agreement, which sets forth amendments to the 1987 ISDA Form reflecting terms specifically negotiated by the parties. (Id.) Brysons' and AIG-FP's obligations under the Swap Agreement are guaranteed by their corporate parents, Brookfield and AIG, which are listed as "Specified Entities" in the Schedule to the ISDA Agreement. (Cmplt. ¶ 24)

The Swap Agreement provides AIG-FP a bi-annual right, beginning in 1995, to cancel the two swaps. (Cmplt. ¶ 21) Upon AIG-FP's exercise of this cancellation right, the party who owes money to the other on a net present value basis would have to make a final payment of the amounts incurred from the inception of the swaps through the date of cancellation. (Id.)

Under the terms of the 1987 ISDA Form, the Swap Agreement between AIG-FP and Brysons terminates automatically upon the occurrence of one of several "Events of Default" listed in § 5(a) of the Agreement. (Cmplt. ¶¶ 23, 25, 27) These Events of Default include, inter alia, when either party or Specified Entity: (1) "is dissolved"; (2) "becomes insolvent or fails or is unable or admits in writing its inability generally to pay its debts as they become due"; (3) "institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights"; (4) "has a resolution passed for its winding up or liquidation"; or (5) "seeks or becomes subject to the appointment of an administrator, receiver, trustee, custodian or other similar official for it or for all or substantially all of its assets. . . ." (Cmplt., Ex. A § 5(a)(vii)) In addition, an Event of Default occurs under the 1987 ISDA Form when any event occurs that "has an analogous effect" to any of the events listed in Section 5(a)(vii), or when either party or Specified Entity "takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the foregoing acts." (Cmplt., Ex. A § 5(a)(vii)(7), (8))

According to the Complaint, the Swap Agreement also provides that when an Event of Default occurs, no obligation is imposed on the non-defaulting party. (Cmplt. ¶ 28) (citing Cmplt., Ex. A § 6(e)(i)(1)) "Thus, a defaulting party may not recover future payments potentially owed by the non-defaulting party, even if the present value of those amounts exceeds the present value of the future payments the defaulting party potentially owes the non-defaulting party." (Cmplt. ¶ 28)

The Complaint alleges that the Event of Default provisions of the 1987 ISDA Form were intended to allow for "automatic early termination to be triggered well in advance of a bankruptcy proceeding," because "[s]wap dealers want[] to avoid the uncertainties of resolving their obligations in bankruptcy." (Cmplt. ¶ 26) "Historically, these broad Event of Default provisions . . . favored swap dealers like AIG-FP over their corporate counterparties and other 'end users' like Brysons, because swap dealers generally had stronger credit ratings than their customers and viewed themselves as less likely to be the defaulting party." (Cmplt. ¶ 28) Indeed, when the Swap Agreement was executed, "AIG was AAA-rated and considered one of the most secure non-governmental credits in the world," while "Brookfield's senior unsecured debt was rated AA (low) and A." (Id.)

In 1992, the ISDA Form was revised to provide that certain Events of Default that had previously triggered automatic termination would "lead to termination only if the other party took action to issue a notice of termination before the default had been cured." (Cmplt. ¶ 31) "The 1992 ISDA Form also revised the close-out provision in Section 6(e)(i)(1) by changing its terms but giving swap parties the option to choose the 1987 [ISDA] Form's terms instead." (Id.)

The Complaint alleges that "[o]ver the years, the parties discussed restructuring the swaps," but "AIG never asked Brookfield to substitute the 1992 ISDA Form (or the subsequent 2002 ISDA Form) for the 1987 ISDA Form, even though it was common practice for swap dealers and their existing counterparties to re-document their outstanding swaps under the new forms." (Cmplt. ¶ 34)

II. AIG'S FINANCIAL COLLAPSE AND THE GOVERNMENT BAILOUT

In September 2008, AIG suffered what the Complaint characterizes as "a historic financial collapse." (Cmplt. ¶ 36) As a result of the subprime mortgage crisis, "AIG and AIG- FP suffered billions of dollars of losses." (Cmplt. ¶ 37) On September 12, 2008, AIG contacted the Federal Reserve Bank of New York ("FRBNY") to seek assistance in advance of its potential failure as a result of liquidity constraints. (Cmplt. ¶ 38) In the days that followed, the FRBNY indicated that AIG would not receive government assistance. (Cmplt. ¶¶ 39-40, 42) AIG's lawyers began preparing for a potential bankruptcy filing, and AIG initiated the drawdown of the last of its lines of credit. (Cmplt. ¶¶ 41, 43)

On September 16, 2008, FRBNY changed course and loaned AIG $85 billion "to prevent AIG's failure from adversely affecting the broader financial system." (Cmplt. ¶ 45) In exchange for its investment, the "FRBNY received a 79.9% equity interest in AIG" and "AIG was required to use future cash receipts from asset sales, equity issuances, indebtedness, and other sources to repay amounts outstanding under the government's credit facility." (Cmplt. ¶ 47) The Government also installed Edward Liddy as CEO of AIG (Cmplt. ¶ 48), and the FRBNY appointed three trustees to vote its equity interest in AIG. (Cmplt. ¶ 49) "In the months following their appointment, the Trustees arranged to replace more than half of AIG's Board of Directors." (Id.)

The Complaint alleges that not long after the government bailout of AIG, the firm began to take steps to wind down, liquidate or dissolve AIG-FP. (Cmplt. ¶¶ 50-52)

"On November 10, 2008, AIG announced that it had reached agreements with the Treasury Department and the FRBNY to restructure its debt and to provide AIG with even more cash on easier terms. The restructuring included a reduction of the FRBNY's original $85 billion loan to $60 billion, and a separate infusion by the Treasury Department of $40 billion in exchange for preferred shares." (Cmplt. ¶ 54) "The November 10, 2008 restructuring also included the creation of two new government-created entities designed to limit AIG-FP's losses." These entities were capitalized, in part, with a $52.5 billion loan from the FRBNY, were created to relieve AIG-FP of its "potential payment obligations on [credit default] swaps," and represented "significant additional steps toward winding up AIG-FP." (Cmplt. ¶ 55)

On March 2, 2009, AIG announced fourth quarter losses of $61.7 billion and net losses of $99 billion for 2008. (Cmplt. ¶ 56) "AIG again instructed its attorneys to prepare for an imminent bankruptcy." (Cmplt. ¶ 57) In response, the Treasury Department implemented a new facility, allowing "AIG to draw up to $30 billion over five years . . . in exchange for non-cumulative preferred stock. The Treasury Department also exchanged $40 billion of its existing, perpetual preferred shares in AIG for shares more akin to common equity. Finally the Federal Reserve agreed to reduce and restructure AIG's outstanding debt on terms more favorable to AIG." (Cmplt. ¶ 58)

"By March 2, 2009, the government had provided a total of approximately $182.5 billion to keep AIG afloat." (Cmplt. ¶ 59)

Brookfield and Brysons allege that AIG's financial collapse and the government bailout resulted in the occurrence of several Events of Default. (Cmplt. ¶¶ 60-74)

III. POST-BAILOUT EVENTS

After the government's bailout of AIG, Brookfield and Brysons notified AIG-FP that they believed at least one Event of Default had occurred, terminating their obligations to AIG-FP under the Swap Agreement. (Cmplt. ¶ 75) Denying that any Event of Default had occurred, AIG-FP made payments to Brysons of $9.65 million and $9.61 million on October 20, 2008, and April 20, 2009, respectively. (Cmplt. ¶ 77) Brysons placed those funds in an escrow account. (Id.) On May 19, 2009, the parties entered into a "standstill" agreement in which they agreed to attempt to resolve their dispute before September 30, 2009. (Cmplt. ¶ 78)

On September 30, 2009 -- the day the standstill agreement expired -- Brookfield and Brysons brought this action seeking a declaratory judgment that an Event of Default has occurred, that the Swap Agreement terminated upon the occurrence of an Event of Default, and that they have no further obligations to AIG-FP or AIG under the Swap Agreement. (Cmplt. ¶¶ 80-83) Plaintiffs also seek a judgment awarding them their costs in this action, including reasonable attorneys' fees, pursuant to § 11 of the 1987 ISDA Form. (Cmplt. ¶ 84)

DISCUSSION

"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "In considering a motion to dismiss . . . the court is to accept as true all facts alleged in the complaint," Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007) (citing Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87 (2d Cir. 2002)), and must "draw all reasonable inferences in favor of the plaintiff." Id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)).

A complaint is inadequately pled "if it tenders 'naked assertion[s]' devoid of 'further factual enhancement,'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 557), and does not provide factual allegations sufficient "to give the defendant fair notice of what the claim is and the grounds upon which it rests." Port Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 121 (2d Cir. 2007) (citing Twombly, 550 U.S. 544).

"When determining the sufficiency of plaintiffs' claim for Rule 12(b)(6) purposes, consideration is limited to the factual allegations in plaintiffs' . . . complaint, . . . to documents attached to the complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may be taken, or to documents either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit." Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993). "Under New York law, the initial interpretation of a contract 'is a matter of law for the court to decide.'"*fn2 K. Bell & Assocs. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir. 1996) (quoting Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 299 (2d Cir. 1996)). "Where there are alternative, reasonable constructions of a contract, ...


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