United States District Court, S.D. New York
STARR INTERNATIONAL CO., individually and derivatively on behalf of American International Group, Inc., Plaintiff,
FEDERAL RESERVE BANK OF NEW YORK, Defendant, American International Group, Inc., Nominal defendant.
[Copyrighted Material Omitted]
Duane Louis Loft, Nicholas A. Gravante, Jr., Robert Jeffrey Dwyer, Boies, Schiller & Flexner, LLP, John L. Gardiner, Skadden, Arps, Slate, Meagher & Flom, L.L.P., David Boies, II, Julia Carolyn Hamilton, Armonk, NY, for Plaintiff.
Gary W. Kubek, John S. Kiernan, Maeve L. O'Connor, Debevoise & Plimpton, LLP, Shari Debra Leventhal, Federal Reserve Bank of New York, New York, NY, for Defendant.
Joseph S. Allerhand, Stephen Alan Radin, Weil, Gotshal & Manges LLP, New York, NY, for Nominal defendant.
OPINION & ORDER
PAUL A. ENGELMAYER, District Judge.
This case arises out of the unprecedented financial crisis that unfolded during fall 2008, and, in particular, out of the federal government's rescue of American International Group, Inc. (" AIG" ). Plaintiff Starr International Co. (" Starr" ), a major stockholder in AIG, challenges, directly and derivatively on AIG's behalf, various actions taken by the Federal Reserve Bank of New York (" FRBNY" ) in connection with that rescue. Starr alleges that, by virtue of its actions during the rescue, FRBNY assumed a fiduciary role at AIG, but then breached its fiduciary duties to AIG's shareholders. Most significantly, Starr alleges that FRBNY exploited its control over AIG to force AIG (1) to unwind credit default swap (CDS) contracts with its counterparties on terms needlessly detrimental to AIG, in an effort by FRBNY to fortify the counterparties' balance sheets; and (2) to cede to FRBNY an outsized portion of any residual profits received from AIG's CDS contracts. On those bases and others, Starr argues that FRBNY is liable for breach of fiduciary duty under Delaware law.
FRBNY has moved to dismiss Starr's Amended Complaint, on various grounds. For the reasons that follow, FRBNY's motion to dismiss is granted in full.
I. Background and Underlying Facts
The circumstances underlying AIG's fall and its rescue by the government have been well chronicled in the media  and academic literature. The facts relevant here, as extracted from the presentation in Starr's Complaint, are these:
A. AIG's Business Before September 2008
AIG was founded in 1967, went public in 1969, and thereafter grew into the world's largest family of insurance and financial services companies. Am. Compl. ¶ 21. In the 1980s, AIG began a line of business in which it entered into derivative contracts.
In those contracts, third parties (" counterparties" ) paid AIG a fee— essentially an insurance premium— to take on the risk of business transactions. Id. ¶ 22. This business was run by an arm of AIG known as AIG Financial Products (" AIGFP" ). Id. In 1998, AIGFP expanded this business and began writing insurance policies on structured debt offerings. Id. ¶ 23. Under these contracts, known as credit-default swaps, AIGFP agreed to make the counterparty whole if a credit-linked note, such as a mortgage-backed security, failed to perform because, for example, the underlying debt was not paid. Id. ¶¶ 23-24. Between 1998 and March 2005, AIGFP entered into approximately 200 CDS contracts. AIGFP thereby insured debt securities with a notional amount of nearly $200 billion. Id. ¶ 25. 
After March 2005, AIGFP's business of writing CDS contracts accelerated sharply. Between then and December 2005, AIGFP entered into another approximately 220 CDS contracts. These CDS contracts mostly insured debt securities linked to subprime mortgages. Id. ¶¶ 27-28.
Many securities which AIGFP agreed to insure consisted of, or included, collateralized debt obligations, or CDOs. Id. ¶ 29. A CDO is a complex investment product: It is a security backed by a pool of bonds, loans, or other assets. In the mid-2000s, these assets often included mortgage-backed securities. Id. ¶ 30. Investors may purchase different securities corresponding to different " tranches" of the CDO, which in turn correspond to distinct assets held within the CDO. Because the tranches are comprised of distinct assets, each tranche has its own risk profile and credit rating, and each pays a different interest rate, keyed to the level of risk that the investor will be taking on. Id. ¶ 29. A CDO is a derivative, because its value is derived from events relating to a set of reference securities that may or may not be owned by the parties involved.
In late 2005, however, AIGFP's senior executives concluded that writing CDSs— insurance— on CDOs was unacceptably risky. They decided to stop writing new CDSs backed by subprime mortgage debt. Id. ¶ 32. However, the CDS contracts that AIGFP had already signed remained on its books. Id.
AIGFP's positions relating to CDOs carried two types of risk— credit risk and collateral risk. Id. AIGFP's credit risk was a function of the assets underlying the CDOs and mortgage-backed securities it had insured: If the homeowners who took out the underlying mortgages defaulted, the securities linked to those mortgages would be impaired, and AIGFP would be called upon to make up the difference. In a worst-case scenario, this could require AIGFP to purchase the CDO at full value. Id. ¶ 33. AIGFP's collateral risk arose from the CDS contracts themselves: Many contained a provision requiring AIGFP to post cash collateral if AIGFP's credit rating fell, or if the valuation of the underlying CDOs or mortgage-backed securities that it had insured declined. Id. ¶ 34.
These collateral requirements had the potential to tie up AIGFP's available cash in the event of a market downturn.
In 2007, such a downturn began. The housing market declined, and the value of homes began to fall. Id. ¶ 35. As mortgage default rates soared, mortgage-backed securities became impaired. The securities linked to those mortgage-backed securities— CDOs, synthetic CDOs, and the CDSs insuring them— lost value as well. Id. ¶ 35. AIGFP's CDS counterparties thereupon asserted that the value of the assets AIGFP had insured was falling precipitously. These counterparties made increasingly large collateral calls on AIGFP. This, in turn, forced AIGFP to post collateral, as required by the CDS contracts. Id. ¶ 36.
By summer 2008, AIG had posted nearly $15 billion of cash collateral to its CDS counterparties. Id. ¶ 39. However, as economic conditions continued to deteriorate, AIG faced the prospect of receiving a collateral call that it lacked the liquid assets to meet. Id. ¶ 39. In or about July 2008, AIG's CEO expressed concern to the company's Board of Directors that the company faced a possible liquidity crisis; in such a situation, given the size of AIG's exposure, the only possible source of the necessary liquidity would be the government. Id. ¶ 40. In July 2008, AIG requested access to the Federal Reserve's " discount window" for liquidity assistance. FRBNY denied AIG such access. Id. ¶¶ 41-43.
B. September 2008
On September 12, 2008, Standard & Poor's (" S & P" ) placed AIG on a negative credit watch. Id. ¶ 44. This signaled a potential upcoming downgrade of the company's credit rating. Id. ¶ 44. Over the weekend of September 13-14, 2008, AIG's management made renewed attempts to access the Federal Reserve's discount window for liquidity assistance. AIG began to consider the consequences of filing for protection under the Bankruptcy Code. Id. ¶¶ 45-46.
On Monday, September 15, 2008, Lehman Brothers filed for bankruptcy protection. This significantly worsened the global financial crisis. Id. ¶ 47. That same day, Moody's, S & P, and Fitch all downgraded AIG's long-term credit rating; AIG's stock price dropped sharply. Id. ¶ 48. As a result of these events, AIG was effectively unable to access the short-term lending markets. Id.
On the morning of September 16, 2008, AIG's CEO alerted the government, including FRBNY, that, as a result of its inability to obtain access to liquidity, including via the Federal Reserve's discount window, AIG was seriously considering bankruptcy as an option. Id. ¶ 51.
C. The $85 Billion Credit Facility and October 2008
In response to AIG's September 16, 2008 appeal for access to liquidity, FRBNY took action. FRBNY offered AIG a proposal including a revolving credit facility of $85 billion, fully secured by AIG's assets, and bearing an initial annual interest rate of 14.5%; under the proposal, the government was also to receive AIG common stock carrying approximately 80% voting rights. Id. ¶ 51(a). On the afternoon of September 16, 2008, FRBNY sent AIG a 3-page term sheet describing the proposed transaction. Id. ¶ 52. Starr alleges: " AIG's Board of Directors was left with no choice." Id. Mindful of the company's dire position, the risk that AIG would otherwise be blamed for " a historic global collapse," and FRBNY's admonition that " this was ‘ the only proposal you're going to get,’ " AIG's Board accepted the term sheet, even while regarding FRBNY's " demand
for 80% of the company as outrageous." Id. Starr alleges: " The members of the Board knew that if they refused FRBNY's demands, the blame for a historic global collapse, and the attendant public opprobrium and risk of legal liability, likely would fall on their own shoulders." Id.
On September 17, 2008, before the start of the trading day, AIG's acceptance of the $85 billion credit facility was announced. Id. ¶ 53. On September 18, 2008, AIG's CEO was removed and replaced with Edward Liddy. Liddy, Starr alleges, " would be under the control of FRBNY." Id. ¶ 54.
On September 22, 2008, AIG and FRBNY formally executed the agreement (" the Credit Agreement" ) memorializing the $85 billion credit facility. Id. ¶ 55. Consistent with the parties' September 17 agreement, the Credit Agreement provided that FRBNY's loan to AIG was secured by substantially all of AIG's assets; FRBNY's loan was payable by AIG at an interest rate of approximately 14.5%. Id. ¶¶ 55-56. 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. Id. 
Starr further alleges that, in the days and weeks after the September 16, 2008 extension of the $85 billion rescue facility, FRBNY planted an " on-site team" at AIG. Starr alleges that this team exercised de facto control of AIG's business operations. See generally id. ¶¶ 59-65. As a result of this control, Starr alleges, " FRBNY stood in a fiduciary relationship to AIG's other shareholders and to AIG itself." Id. ¶ 65.
On October 8, 2008, the Federal Reserve Board announced that AIG had drawn down the initial $85 billion credit facility, and that FRBNY had agreed to loan up to an additional $37.8 billion to AIG, secured by investment-grade fixed-income securities held by AIG. Id. ¶ 66.
D. Maiden Lane III
By late October 2008, AIG had posted approximately $35 billion in cash collateral to satisfy calls from its CDS counterparties. Id. ¶ 71. During October, AIG had attempted to extricate itself from the hundreds of CDS contracts it had entered. Its goal was to prevent future rounds of collateral calls from worsening AIG's " liquidity squeeze" if the housing market continued to deteriorate. Id. ¶¶ 68-69. As part of that effort, AIG undertook negotiations with a number of its CDS counterparties; AIG sought to modify or terminate its CDS exposure in exchange for a cash settlement. Id. ¶ 68. Starr alleges that this process had the potential to result in favorable terms for AIG. Id.
However, Starr alleges, instead of allowing these negotiations to come to fruition, FRBNY, as de facto overseer of AIG, forced AIG to repay the CDS counterparties at full par value. These repayments effectively served as what Starr terms " covert ‘ backdoor bailouts' " by FRBNY of AIG's counterparties— other banks and investment companies in the global financial system whom FRBNY favored relative to
AIG. Id. ¶ 69. In forcing this outcome upon AIG, Starr alleges, FRBNY passed up the simpler solution of itself " guarantee[ing] the CDS contracts." That option, Starr alleges, would have given AIG's counterparties, and its private-sector sources of credit, the same assurances that posting collateral provided, while " significantly improv[ing] AIG's liquidity crisis [and] potentially costing taxpayers nothing at all." Id.
To implement FRBNY's " covert backdoor bailout" plan, Starr alleges, a special-purpose vehicle called Maiden Lane III (" ML III" ) was created. Id. ¶ 70. AIG— compelled by FRBNY, according to Starr— conveyed to ML III the $35 billion in already-posted collateral, as well as an additional $5 billion equity investment. Id. ¶ 71. FRBNY then loaned ML III an additional $24.3 billion at an interest rate of one-month LIBOR 1%. Id. ¶¶ 73, 75. Using these funds, ML III then purchased approximately $62 billion worth of CDO securities, at full par value, from AIG's counterparties, to satisfy AIG's obligations under the CDS contracts. Id. ¶ 70. Thus, Starr alleges, although AIG's CDS counterparties received cash equating to full par value, ML III received, in return, CDO securities and mortgage-backed securities of uncertain value. The purchase from AIG's counterparties occurred on November 25, 2008. Id. ¶¶ 67(ii), 70.
The agreement establishing ML III also governed how any proceeds derived from these assets would be distributed. Id. ¶ 80. The first of ML III's obligations to be satisfied was to be the $24.3 billion loan made by FRBNY. Id. Remaining proceeds were to be used to redeem AIG's $5 billion equity investment in ML III. Id. After these two obligations had been satisfied, the " residual" proceeds generated by the mortgage-backed securities or CDOs held by ML III were to be divided between FRBNY and AIG. FRBNY was to receive two-thirds, and AIG, one-third. Id. ¶ 81.
Starr alleges that, had AIG been left to negotiate with its CDS counterparties, rather than being forced to pay par value, AIG would have been able to negotiate more favorable settlements to the CDS contracts than those achieved by ML III. Id. ¶¶ 84-90. Starr alleges that, on one occasion, AIG was forced by FRBNY to turn down a concession that a CDS counterparty had offered. Id. ¶ 89. Starr also alleges that FRBNY forced AIG to agree, in the ML III transaction, to waive any claims that AIG may have had against the counterparties under the CDS contracts. Id. ¶¶ 91-93.
E. The Trust Agreement and Issuance of the Series C Shares
In January 2009, the Trust was created to receive the Series C shares contemplated by the September 2008 $85 billion credit facility. Id. ¶¶ 57, 67(b). Upon its creation, the Trust had three trustees. Two had previous ties to FRBNY, although neither was associated with FRBNY at the time. Id. ¶¶ 102-103.
The Trust Agreement gave the trustees absolute discretion and control over the Series C shares, including as to how to exercise their 79.9% voting rights. Id. ¶ 101. The Trust Agreement also limited the Trustees' ability to place FRBNY affiliates on AIG's Board: It provided that the
" Trustees shall Vote to elect ... as members of the board of directors of [AIG] only persons who are not, and have not been within one year of their nomination, officers, directors, or senior employees of the FRBNY or the Treasury Department." Kiernan Decl. Ex. 2 at 7. The Trust Agreement, in a section entitled " Exercise of Trust Stock Voting Rights, " recited that " it is the FRBNY's view that (x) maximizing [AIG]'s ability to honor its commitments to, and repay all amounts owed to, the FRBNY or the Treasury Department and (y) the Company being managed in a manner that will not disrupt financial market conditions, are both consistent with maximizing the value of the Trust Stock." Am. Compl. ¶ 104; see also Kiernan Decl. Ex. 2 at 7. Notwithstanding that, the Trust Agreement provided: " In no event ... shall information by the FRBNY as lender relieve the Trustees from exercising their independent judgment with respect to any action to be taken under this Section 2.04." Id. at 8.
On March 4, 2009, AIG issued the Series C shares to the Trust. Am. Compl. ¶ 67(b). These shares as issued carried a 79.9% voting interest, and were convertible into a 79.9% share of AIG common stock. Id. ¶ 57.
F. Conversion of the Series C Shares to Common Stock
As of the issuance of the Series C shares, AIG's certificate of incorporation (the " Charter" ) authorized the issuance of up to 5 billion shares of AIG common stock. Id. ¶ 110. However, 3 billion of those shares had already been issued or reserved. Id. Thus, even if AIG had issued all remaining authorized shares of common stock to the Trust, the Trust would have had only a 40% stake in AIG's common stock, not the 79.9% stake that AIG's Board had agreed the Trust would receive in accepting the $85 billion credit facility. Id.
Under § 242 of the Delaware General Corporation law, which governs AIG's Charter, any increase in the number of authorized shares of a particular class of stock requires approval by a vote of the holders of that class of shares. Id. ¶ 109. In other words, AIG's Charter could not be amended to authorize additional shares of common stock unless a majority of common shareholders so voted. Id. On November 4, 2008, a lawsuit was filed in Delaware Chancery Court to ensure that the Series C Preferred Stock would not be " convertible into common stock absent a class vote" by the common stock shareholders. Id. ¶ 111. On February 5, 2009, after AIG agreed to hold a vote before increasing the number of authorized common shares, the Delaware court entered a stipulated order of dismissal because that agreement had mooted the lawsuit. Id. ¶ 112. In subsequent filings and disclosures, AIG represented that the common
shareholders would be given the opportunity to vote on an increase in the authorized number of shares of AIG common stock. Id. ¶ 113; see also id. ¶¶ 114-16.
On or about June 5, 2009, AIG circulated its 2009 proxy statement in advance of its annual shareholder meeting, scheduled for June 30, 2009. Id. ¶ 120. One proposal contained in the proxy (" Proposal 3" ) was to increase the number of authorized shares of common stock. Id. The proxy statement noted that approval of Proposal 3 would require a majority vote of Common Stock and the Series C shares, taken together, plus a separate majority vote of the common shareholders, voting as a separate class. Id. ¶ 121. That proposal failed, because AIG's common shareholders did not approve it. Id. ¶ 122.
The proxy also included " Proposal 4." Id. ¶ 123. Proposal 4 was to effect a 20:1 reverse stock split of AIG's issued shares of common stock. If approved, Proposal 4 would reduce the approximately 3 billion issued shares of common stock to 150 million shares, while the total number of authorized shares of such stock would remain at 5 billion. Id. Starr alleges that Proposal 4 therefore served as a means to " evade the requirement of an affirmative vote by AIG's [c]ommon [s]tock shareholders" because it would free up enough issued common shares to enable the Series C shares to be converted into the 79.9% block of common stock promised to the Trust. Id. Because Proposal 4 required only a single vote by all AIG shares voting together— including the Series C shares held by the Trust that carried a 79.9% voting interest— common shareholders were unable to block Proposal 4. Id. Based on the yes vote of the Trust's Series C shares, Proposal 4 was adopted. Id. ¶ 125.
G. AIG's Exit Plan
More than 15 months later— on September 30, 2010— AIG announced an " exit plan" designed to satisfy all of its obligations arising out of the numerous rescue packages it had accepted in 2008. Id. ¶ 128. As part of this plan, AIG undertook to: (1) repay and terminate the Credit Agreement with FRBNY; (2) exchange the Series C shares for common stock; and (3) permit the United States Treasury to gradually sell off its stake in AIG which, between the common stock obtained from conversion of the Series C shares and other stock issued pursuant to the Troubled Asset Relief Program, amounted to 92.1% of AIG. Id. ¶ 130.
Pursuant to this plan, on January 14, 2011, the Series C shares were exchanged for 562,868,096 shares of AIG common stock. AIG fully repaid FRBNY for the outstanding balance of the $85 billion credit facility. Id. ¶¶ 128, 133.
II. Procedural History
A. The Complaint and Amended Complaint
On November 21, 2011, Starr filed the Complaint in this case. Dkt. 1. The same day, Starr filed a complaint in the United States Court of Federal Claims (" the CFC Complaint" ). See Starr Int'l Co. v. United States, 106 Fed.Cl. 50 (2012). Starr's CFC Complaint recited essentially the same conduct at issue in this case. However, it named the United States, not FRBNY, as the primary defendant, and brought solely constitutional claims, including claims based on the takings clause of the Fifth Amendment.
On January 23, 2012, the Court endorsed a stipulation in this case providing for: (1) Starr to file an amended complaint; (2) FRBNY to file a motion to dismiss within 60 days; (3) Starr to file an opposition 60 days thereafter; and (4) FRBNY to submit a reply 30 days after
the filing of an opposition. Dkt. 10. On February 1, 2012, Starr filed an Amended Complaint. Dkt. 17.
The Amended Complaint— the operative pleading in the case— formally brings six claims. In substance, however, there are three claims, each brought both directly on Starr's own behalf and derivatively by Starr on AIG's behalf.
First, Starr alleges, FRBNY breached the fiduciary duty it allegedly owed to AIG and its shareholders, by virtue of " its control of AIG and its power to act on behalf of AIG." Am. Compl. ¶ 146. Starr alleges that, while controlling AIG, FRBNY took actions involving self-dealing " that were deliberately contrary to the interests of the company." Id. ¶ 147; see also id. ¶¶ 154-156. These actions, Starr alleges, included forcing upon AIG the September 2008 Credit Agreement, the November 2008 Maiden Lane III transaction (and the " backdoor bailouts" and its other terms assertedly unfavorable to AIG's interests), and the later stock transactions (in June 2009 and January 2011) implementing the terms of the Credit Agreement.
Second, Starr alleges, FRBNY aided and abetted AIG's officers and directors in breaching their fiduciary duties to AIG and its other shareholders. Starr's aiding and abetting claim is based on the same events as its fiduciary duty claim. Id. ¶¶ 150-52, 158-160.
Third, Starr alleges, FRBNY violated the Equal Protection, Due Process, and Takings Clauses of the United States Constitution by expropriating AIG's assets, in a discriminatory manner, and without due process or just compensation. Id. ¶¶ 162-165; 167-169.
B. Subsequent Proceedings
On April 2, 2012, FRBNY moved to dismiss the Amended Complaint. Dkt. 21-23. On June 1, 2012, Starr filed an opposition to FRBNY's motion. Dkt. 26. On July 2, 2012, FRBNY filed its reply. Dkt. 27-28.
On July 2, 2012, the Court of Federal Claims issued an opinion on the United States's motion to dismiss the Complaint in Starr's parallel action in that court. The Court of Claims denied the United States's motion in substantial part; however, it granted the motion as to Starr's Equal Protection claim and a portion of Starr's Due Process claim. See Starr Int'l Co. v. United States, 106 Fed.Cl. 50 (2012) (" Starr CFC Decision " ). On July 17, 2012, this Court granted the parties leave to submit brief letters, by July 20, 2012, addressing the Court of Federal Claims' decision. The parties submitted those letters.
On July 26, 2012, the Court heard more than three hours of oral argument on this motion. The Court reserved decision on FRBNY's motion.
C. Status of AIG's Consideration of Starr's Derivative Claims
Among the bases for FRBNY's motion to dismiss was that— to the extent Starr's claims were properly seen as derivative— Starr had not made a demand upon AIG's board and the requirement of such a demand was not excused on account of futility. As of July 26, 2012, the date of argument, as a result of a stipulation approved by the Court, the deadline for nominal defendant AIG to answer, move, or otherwise respond to the Amended Complaint, see Fed.R.Civ.P. 12(a)(1), had not yet passed. AIG's directors therefore had
not been called upon to decide whether to adopt Starr's claims (to the extent derivative) against FRBNY in this Court.
At argument, counsel for AIG reported that, as a result of the Court of Federal Claims' denial of the United States's motion to dismiss, AIG's directors, in August 2012, would be discussing whether to join Starr's lawsuit in that court. This Court directed AIG's counsel to inform the Court promptly by letter of that decision, once made. At argument, this Court also strongly encouraged AIG's Board to determine, at the same time, whether to adopt this lawsuit.
On August 20, 2012, AIG submitted a response to the Court, reporting on its Board's discussions. Dkt. 33. AIG stated that Starr had agreed to make a demand on AIG's Board with respect to Starr's Maiden Lane III claims, which Starr has conceded are derivative in nature. Id. at 2. Following that demand, AIG stated, its Board planned to receive written presentations regarding Starr's derivative claims from Starr, the government, and FRBNY, and, at a Board meeting scheduled for January 9, 2013, oral presentations by these parties. Id. at 3-4. AIG's letter represented that its Board anticipated deciding whether to join the lawsuit— i.e., whether to adopt Starr's allegations here as its own— by the end of January 2013. Id. at 4. 
III. Starr's Fiduciary Duty Claims
At the outset, it is important to isolate the actions of FRBNY that are and are not at issue here. Starr's Amended Complaint trains much of its fire on FRBNY's actions in September 2008. Specifically, it sharply criticizes FRBNY for (1) the actions leading up to the September 17, 2008 term sheet and September 22, 2008 Credit Agreement with AIG, including its alleged refusal to allow AIG access to the Federal Reserve's discount window, (2) the terms of the Credit Agreement, which Starr claims were needlessly harsh, and (3) FRBNY's actions towards AIG in the immediate aftermath of that Agreement, which Starr depicts as high-handed. See, e.g., Am. Compl. ¶¶ 41-66. However, none of those actions is within the scope of this lawsuit. That is because the statute of limitations for breach of fiduciary duty in Delaware is three years, see Del.Code tit. 10, § 8106; Graulich v. Dell, Inc., C.A. No. 5846-CC, 2011 Del.Ch. LEXIS 76, at *26 (Del.Ch. May 16, 2011), and Starr did not file the original Complaint in this case until November 21, 2011. At argument, Starr conceded that any claim for breach of fiduciary duty challenging actions taken before November 21, 2008 is time-barred. See Hg. Tr. 62 (" The Court: The statute [of limitations] is three years from November 2011. Mr. Boies: Exactly." ).
In light of that concession, Starr seeks to hold FRBNY accountable for three discrete later actions by FRBNY, which Starr casts as breaches of its purported fiduciary duty to AIG and its shareholders.
The first is the November 2008 Maiden Lane III transaction. Starr's principal allegation is that AIG was forced by FRBNY to pay excessive amounts to its counterparties to satisfy its obligations under the CDS contracts. As noted, Starr claims that that transaction served as a " backdoor bailout" by FRBNY of these counterparties. Starr also claims that the terms of ML III unfairly allowed FRBNY to realize a profit on the transaction at AIG's expense, by reserving for FRBNY a two-thirds share of the residual proceeds recovered from AIG's CDS contracts and mortgage-backed securities after FRBNY's loans and AIG's equity contribution to ML III, and other sunk costs, had been repaid.
The second is the June 2009 20:1 reverse stock split of AIG's common shares. Starr claims that FRBNY brought about that stock split to circumvent the vote of AIG's common shareholders rejecting a proposal to increase the number of authorized shares of AIG's common stock. That vote, Starr states, had effectively blocked AIG from issuing the Trust the 79.9% of AIG's common stock contemplated by the Credit Agreement. But, Starr states, the reverse stock split served as an end-run around the common shareholders' vote by freeing up common shares that could be issued to the Trust. Starr further notes that the company's common shareholders were powerless to prevent the reverse stock split, because it was approved by a vote of all AIG shareholders, including the Trust, whose preferred shares enabled it to dictate the vote's outcome.
The third action that Starr protests is the January 2011 exchange of the Treasury's Series C shares for AIG common stock.
In moving to dismiss, FRBNY makes a series of alternative arguments.
First, FRBNY argues, Starr's claims are all derivative, and must be dismissed because Starr did not make a pre-suit demand on AIG and the requirement of such a demand was not excused. Second, FRBNY argues, Starr has failed adequately to plead control by FRBNY of AIG, and therefore the existence of a fiduciary relationship between FRBNY and AIG. Third, even if FRBNY was plausibly pled to have stood in a fiduciary relationship to AIG, Delaware fiduciary duty law does not apply to FRBNY. This is so either because such law is preempted as applied to FRBNY, as a federal instrumentality; or because the legal standards to which FRBNY is subject are supplied by federal common law, which should not be read in this context to incorporate or borrow state fiduciary law. Fourth, even if Delaware fiduciary duty law applies to FRBNY's actions with respect to AIG, none of FRBNY's actions breached such duty. Starr disputes each point.
For the reasons that follow, the Court dismisses Starr's fiduciary duty claims for two independent reasons.
First, measured against the settled standards for corporate control under Delaware law, Starr has not adequately pled that FRBNY controlled AIG at the time of any of the three relevant events ( i.e., November 2008, June 2009, and January 2011). Starr therefore has not adequately pled that FRBNY was, at those times, a fiduciary to AIG and its shareholders.
Second, even assuming arguendo that FRBNY was such a fiduciary, Delaware fiduciary duty law does not apply to FRBNY's actions challenged here. That is so whether the issue is analyzed as one
of federal preemption or as one of appropriate borrowing of state law by federal common law. That is because, at the time it assertedly was a fiduciary of AIG's, FRBNY was also a federal instrumentality charged with vitally important statutory responsibilities. These included preserving the stability of the nation's banking system and economy. FRBNY's challenged actions with regard to AIG during the financial crisis were integrally bound up in the rescue loan packages it furnished AIG in fall 2008, made with the goal of stabilizing the American economy. And, where imposing state-law duties upon a federal instrumentality would squarely conflict with its federal responsibilities, as would subjecting FRBNY to Delaware fiduciary duty law in connection with the terms of its serial rescues of AIG, such state law is preempted and is not properly borrowed by federal common law.
B. Applicable Legal Standards
In resolving a motion to dismiss, the Court must " construe the Complaint liberally, accepting all factual allegations in the Complaint as true, and drawing all reasonable inferences in plaintiff['s] favor." Galiano v. Fid. Nat'l Title Ins. Co., 684 F.3d 309, 311 (2d Cir.2012). Nevertheless, the " [f]actual allegations must be enough to raise a right of relief above the speculative level," and the complaint must plead " enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [plaintiff's claim]." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Put differently, " [t]o 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, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955).
" The plausibility standard is not akin to a ‘ probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 556, 127 S.Ct. 1955). " A pleading that offers ‘ labels and conclusions' or ‘ a formulaic recitation of the elements of a cause of action will not do.’ Nor does a complaint suffice if it tenders ‘ naked assertion[s]’ devoid of ‘ further factual enhancement.’ " Id. (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). " Where a complaint pleads facts that are ‘ merely consistent with’ a defendant's liability, it ‘ stops short of the line between possibility and plausibility of entitlement to relief.’ " Id. (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955).
In applying these principles to a particular case, the Court " must confine its consideration to facts stated on the face of the complaint, in documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken." Tarshis v. Riese Org., 211 F.3d 30, 39 (2d Cir.2000) (citing Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir.1991)).
C. Starr Does Not Adequately Allege That FRBNY Was a Fiduciary of AIG's
It is axiomatic that, for an entity to be liable for breach of a fiduciary duty owed to a corporation, it must have had control over that corporation. As the Delaware Chancery Court has repeatedly emphasized, " the very essence of a breach of corporate law fiduciary duty claim is the misuse of corporate control," Sample v. Morgan, 935 A.2d 1046, 1059 (Del.Ch.2007) (Strine, V.C.), and " [f]iduciary duties ... arise from control,"
Citron v. Steego Corp., C.A. No. 10171, 1988 WL 94738, at *6, 1988 Del.Ch. LEXIS 119, at *16 (Del.Ch. Sept. 9, 1988) (citing Ivanhoe Partners v. Newmont Mining Co., 535 A.2d 1334 (Del.1987)).
Under Delaware law, an entity controls a corporation, and therefore owes a fiduciary duty to it and its shareholders, in two circumstances: First, where it is a majority shareholder in the corporation; and, second, where it is a minority shareholder but exercises actual control over corporate conduct. Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del.1989); Ivanhoe Partners, 535 A.2d at 1344; see also Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1113-14 (Del.1994); In Re Sea-Land Corp. Shareholders Litig. (In Re Sea-Land Corp.), C.A. No. 8453, 1987 WL 11283, at *4, 1987 Del.Ch. LEXIS 439, at *12 (Del.Ch. May 22, 1987); Gilbert v. El Paso Co., 490 A.2d 1050, 1055 (Del.1984). For a minority shareholder to control corporate conduct, a plaintiff must show " domination by a minority shareholder through actual exercise of direction over corporate conduct." Gilbert, 490 A.2d at 1055 (citation omitted); see also Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del.2005); Kahn, 638 A.2d at 1114; Aronson v. Lewis, 473 A.2d 805, 815 (Del.1984); In Re Sea-Land Corp., 1987 WL 11283, at *3-4, 1987 Del.Ch. LEXIS 439, at *10; Kaplan v. Centex, 284 A.2d 119 (Del.Ch.1971); Puma v. Marriott, 283 A.2d 693 (Del.Ch.1971). " The potential ability to exercise control" does not suffice, as it " is not equivalent to the actual exercise of that ability." In Re Sea-Land Corp., 1987 WL 11283, at *5, 1987 Del.Ch. LEXIS 439, at *10 (emphasis in original); see also Gilbert, 490 A.2d at 1055-1056.
Because Starr alleges breaches by FRBNY of fiduciary duties to AIG, a threshold issue is, therefore, whether Starr has met its burden to plead, plausibly, that FRBNY controlled AIG, either as a majority shareholder or by the exercise of actual control, and therefore was AIG's fiduciary. To be sure, Starr's Amended Complaint paints a portrait of government treachery worthy of an Oliver Stone movie. Starr claims that, as the global financial system teetered on the brink of collapse, FRBNY seized control of AIG. Then, Starr claims, FRBNY, in an act of Napoleonic plunder, stole AIG's assets, re-distributing some to shore up other flagging financial institutions while keeping much of the residue for itself. It is, however, one thing to make a sweeping and dramatic claim of government misconduct. It is quite another to plead plausibly— under the established standards of Delaware law, and based on concrete factual allegations, as Twombly and Iqbal require— that FRBNY exercised control over AIG.
Specifically, in light of Starr's claims of three distinct breaches of duty, the Court must evaluate whether Starr has adequately pled control of AIG by FRBNY as of each of the three distinct moments when the conduct constituting those alleges breaches occurred— i.e., in November 2008, June 2009, and January 2011. Because, however, Starr's narrative begins by claiming that FRBNY's domination of AIG began earlier, including on September 17, 2008, when AIG's Board accepted the $85 billion credit facility, and on September 22, 2008, when it executed the Credit Agreement, the Court first analyzes the adequacy of Starr's suggestion that FRBNY controlled AIG at those points.
1. Did FRBNY Control AIG When AIG's Board Accepted the $85 Billion Credit Facility (September 17, 2008) and Entered into the Credit Agreement (September 22, 2008)?
Under the September 17, 2008 agreement between AIG and FRBNY, memorialized in the September 22, 2008 Credit
Agreement, FRBNY extended an $85 billion credit facility to AIG in return for: interest at an " exceptionally high interest rate" ; security; and an agreement to later issue the Series C shares, carrying a 79.9% voting stake, to a Trust with the United States Treasury as the sole beneficiary. Am. Compl. ¶¶ 51(a), 52, 57. Starr claims that FRBNY " coerced" AIG into accepting these terms, which " amounted to stealing the Company." Id. ¶ 51(a).
Starr's claim that FRBNY controlled AIG at the moment of this agreement is based on the following allegations: (1) " The members of the Board knew that if they refused FRBNY's demands, the blame for a historic global collapse, and the attendant public opprobrium and risk of legal liability, likely would fall on their own shoulders" ; (2) FRBNY had " declin[ed] to grant AIG liquidity access on the same terms as other similarly situated entities with lower quality collateral" ; (3) FRBNY " contributed to a credit downgrade" by " repeatedly and inaccurately representing that there would be no Government assistance to AIG" ; (4) FRBNY organized a " private-sector effort" to rescue the bank which FRBNY " did not believe had a significant chance of success" ; (5) FRBNY " ensur[ed] through its actions and representations that the Board would have only hours to make the decision to avoid a global economic meltdown" ; (6) FRBNY " inform[ed] AIG that it should try to undo its plans for bankruptcy without first informing AIG of its intentions" ; and (7) FRBNY " falsely and irresponsibly represent[ed] that it was willing to risk destroying the global economy if the AIG Board did not accept its extortionate demands." Id. ¶ 52. These steps, Starr alleges, left AIG's Board with " no choice" but to accept FRBNY's terms. Id. Starr alleges: " The Credit Agreement was imposed upon, and not voluntarily agreed to by, the AIG board." Id. ¶ 58.
The Court puts Starr's rhetorical declarations about AIG's lack of choice and volition to one side, because they are the quintessential " labels and conclusions" and " naked assertions" which the Supreme Court has instructed " will not do." See Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). However, on a motion to dismiss, the factual allegations in Starr's narrative must be taken as true. These include that FRBNY pressured AIG to enter into the Credit Agreement by " irresponsibly" ...