Murray v. Geithner

• Decision Date: 14 January 2011
• Docket Number: Civil No. 08–15147.
• Parties: Kevin J. MURRAY, Plaintiff,v.Timothy F. GEITHNER and Board of Governors of the Federal Reserve System, Defendants.
• Court: U.S. District Court — Eastern District of Michigan

763 F.Supp.2d 860

Kevin J. MURRAY, Plaintiff,

v.Timothy F. GEITHNER and Board of Governors of the Federal Reserve System, Defendants.

Civil No. 08–15147.

United States District Court, E.D. Michigan, Southern Division.

Jan. 14, 2011.

David Yerushalmi, Law Offices of David Yerushalmi, Chandler, AZ, Robert J. Muise, Ann Arbor, MI, for Plaintiff.Julie Straus, Washington, DC, for Defendants.

OPINION AND ORDER

LAWRENCE P. ZATKOFF, District Judge.

I. INTRODUCTION

This matter is before the Court on Plaintiff's motion for summary judgment [dkt. 57], Defendants' motion for summary judgment [dkt. 66/67], ¹ and Plaintiff's motion to strike [dkt. 79]. The parties have fully briefed the motions. The Court finds that the facts and legal arguments are adequately presented in the parties' papers such that the decision process would not be significantly aided by oral argument. Therefore, pursuant to E.D. Mich. L.R. 7.1(f)(2), it is hereby ORDERED that the motions be resolved on the briefs submitted. For the reasons set forth below, Plaintiff's motion for summary judgment is DENIED, Defendants' motion for summary judgment is GRANTED, and Plaintiff's motion to strike is DENIED.

II. BACKGROUND

The basic facts surrounding the government's assistance to American International Group, Inc. (“AIG”) are a matter of public record. In the fall of 2008, what the parties describe as a largescale economic crises erupted, purportedly threatening the liquidity and stability of financial institutions both domestically and abroad. At that time, AIG was one of the world's largest and most complex financial institutions, prompting officials from the Board of Governors of the Federal Reserve System (“Board of Governors”), in consultation with the United States Department of the Treasury (“Treasury Department”), to conclude that AIG's failure would be “catastrophic” for the United States and the world economy.

On September 16, 2008, the Federal Reserve Bank of New York (“FRBNY”), with authorization from the Board of Governors, agreed to create a credit facility that enabled AIG to draw up to $85 billion for general corporate purposes, including as a liquidity source, pursuant to the “unusual and exigent circumstances clause” of Section 13(3) of the Federal Reserve Act (“FRA”), 12 U.S.C. § 343—purportedly the only mechanism then available for providing government financial assistance to institutions such as AIG. In return for the credit facility, AIG signed a trust agreement whereby it agreed to pay interest and fees to the FRBNY and to issue Series C preferred stock to a trust—the AIG Credit Facility Trust (“Trust”)—that would hold the stock for the benefit of the Treasury Department. The trust agreement provided that holders of Series C preferred stock were entitled to 79.9% (subsequently reduced to 77.9%) of the dividend payments and 79.9% (subsequently reduced to 77.9%) of the aggregate voting power of the common stock. The trust agreement permitted the Board of Governors to terminate or amend the Trust pursuant to its authority under the FRA.

In AIG's Form 8–K filed with the United States Securities and Exchange Commission (“SEC”) in March 2009, AIG reported the transfer of the preferred shares of its stock to the Trust. The filing stated that “[a]s a result of the Transaction, a change in control of AIG has occurred. Pursuant to the Purchase Agreement, AIG and AIG's Board of Directors are obligated to work in good faith with the Trust to ensure corporate governance arrangements satisfactory to the Trust.” In AIG's annual report to the SEC, it explained that “the Trust, which is overseen by three independent trustees, will hold a controlling interest in AIG, [and] AIG's interests and those of AIG's minority shareholders may not be the same as those of the Trust or the United States Treasury.”

On October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”), 12 U.S.C. § 5201 et seq., with the following stated purpose:

[T]o immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States ... in a manner that (A) protects home values, college funds, retirement accounts, and life savings; (B) preserves homeownership and promotes jobs and economic growth; (C) maximizes overall returns to the taxpayers of the United States; and (D) provides public accountability for the exercise of such authority.

12 U.S.C. § 5201.

To accomplish this purpose, the EESA provides the Secretary of the Treasury Department (“Secretary”) with the authority “to establish the Troubled Asset Relief Program (or ‘TARP’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary.” 12 U.S.C. § 5211(a)(1). The EESA defines “troubled assets” as, inter alia, “financial instrument[s] that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability.” 12 U.S.C. § 5202(9)(B). In exercising this authority, the Secretary must “take into consideration” several goals, including, inter alia, “protecting the interests of taxpayers,” “providing stability and preventing disruption to financial markets in order to limit the impact on the economy and protect American jobs, savings, and retirement security,” and “ensuring that all financial institutions are eligible to participate in the program, without discrimination based on size, geography, form of organization, or the size, type, and number of assets eligible for purchase.” 12 U.S.C. § 5213.

Despite the credit given to AIG under the FRA, the Board of Governors believed that AIG remained extremely vulnerable to an ongoing and intensifying financial crisis due to falling asset prices and substantial losses on its balance sheet. On November 25, 2008, the Secretary exercised the authority granted to him under the EESA to purchase $40 billion of newly issued AIG Series D preferred stock on the condition that AIG use the proceeds solely to pay down it's indebtedness to the FRBNY. The Treasury Department paid the $40 billion purchase price for the Series D preferred stock directly to the FRBNY.

On March 2, 2009, when AIG reported a net loss of $61.7 billion for the fourth quarter of 2008, the Treasury Department announced that it would further restructure the government's assistance to AIG. Accordingly, on April 17, 2009, the Secretary entered into an agreement to purchase AIG Series F preferred shares (“Series F SPA”) pursuant to the EESA. The Series F SPA created an equity capital commitment (“Commitment”) of just under $30 billion, which allows AIG to draw capital from the Commitment over time. As of the date of Plaintiff's summary judgment motion, AIG had drawn down approximately $7.5 billion from the Commitment.

As required by the Series F SPA, AIG provided a capital use plan prior to the closing of the agreement (“Initial Capital Use Plan”), which stated that the capital provided by the Commitment would be used to achieve four objectives: (1) maintaining adequate capital levels at its principal insurance operations; (2) facilitating divestitures and restructuring; (3) supporting and accelerating the orderly wind-down of AIG Financial Products; and (4) paying general corporate expenses related to the rationalization of AIG's operations. AIG is a holding company that is the corporate parent to approximately 290 direct and indirect subsidiaries that operate around the world. EESA funds are distributed to AIG, which is then able to divert funds to its subsidiaries. The Series F SPA requires AIG to certify the manner in which it actually diverts funds.

AIG has advertised itself as the market leader in Sharia-compliant financing (“SCF”), i.e., financial and insurance products that comply with certain dictates of Islamic law, such that Islamic adherents are not prohibited from purchasing the products for religious reasons.² AIG defines “Sharia” as “Islamic law based on Quran [sic] and the teachings of the Prophet (PBUH).” ³ A prominent example of SCF is Takaful—a form of insurance acceptable to purchase by certain Islamic adherents because: (1) policyholder funds are separated from shareholder funds; (2) funds are not invested in anything that is haram, i.e., prohibited elements in Islam according to Sharia; (3) a certain percentage of any net surplus, if any, derived from the collection of premiums is paid to charitable organizations, and (4) policyholder funds are not used to borrow, lend, or enter into any financial transaction that is “unislamic.” AIG, through several of its subsidiaries, offers products that comply with Sharia by employing or otherwise engaging individuals knowledgeable in Sharia (“Sharia authorities”), who act as “Sharia Supervisory Committees.” The role of the Sharia authorities is to review AIG's operations, supervise its development of SCF, and determine whether AIG's products comply with Sharia. In December 2008, AIG issued a press release announcing the “First Takaful Homeowners Products for U.S.” The press release stated that “[a]ccording to Ernst & Young's 2008 World Takaful Report, Takaful was estimated to be a $5.7 billion market globally with over 130 providers in 2006. The Takaful market is estimated to be in excess of $10 billion by 2010.” Of AIG's approximate 290 subsidiaries, six have engaged in SCF since the enactment of the EESA.

In the Court's opinion and order denying Defendants' motion to dismiss, the Court held that Plaintiff has standing to bring an as-applied challenge to the EESA on the basis that the “appropriated funds are being used to finance Sharia-based Islamic religious activities in violation of the Establishment Clause.” Plaintiff asks the Court to declare that (1) Defendants violated the Establishment...