Starr Int'l Co. v. United States
| Decision Date | 02 July 2012 |
| Docket Number | No. 11-779C,11-779C |
| Parties | STARR INTERNATIONAL COMPANY, INC., Plaintiff, v. THE UNITED STATES, Defendant, and AMERICAN INTERNATIONAL GROUP, INC., Nominal Defendant. |
| Court | U.S. Claims Court |
Claims Arising From Government
Bailout of Distressed Entity; Fifth
Amendment Takings Claims;
Government's Motion to Dismiss
Pursuant to RCFC 12(b)(1) and
12(b)(6); 28 U.S.C. § 1500; Equal
Protection and Due Process Claims;
Standing; Unconstitutional Condition
Claim; Illegal Exaction Claim.
David Boies, with whom were Robert J. Dwyer, Nicholas A. Gravante Jr., Hamish P. M. Hume, Samuel C. Kaplan, Duane L. Loft, Julia C. Hamilton, and Luke Thara, Boies, Schiller & Flexner LLP, Armonk, New York, and John L. Gardiner, Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, for Plaintiff, Starr International Company, Inc.
Brian M. Simkin, Assistant Director, with whom were Stuart F. Delery, Acting Assistant Attorney General, Jeanne E. Davidson, Director, Shalom Brilliant, Timothy P. McIlmail, Brian A. Mizoguchi, John Roberson, Senior Trial Counsel, Christopher A. Bowen, Renee A. Gerber, Karen V. Goff, Michael S. Macko, John J. Todor, Amanda L. Tantum, Jacob A. Schunk, and Vincent D. Phillips, Trial Attorneys, Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington, DC, for Defendant.
Joseph S. Allerhand, Stephen A. Radin, and Jamie L. Hoxie, Weil, Gotshal & Manges LLP, New York, New York, for Nominal Defendant, American International Group, Inc.
OPINION AND ORDER ON
This case arises from the Government's bailout of American International Group, Inc. ("AIG") in September 2008 as AIG faced a liquidity crisis. At that time, Plaintiff, Starr International Company, Inc. ("Starr") was one of the largest shareholders of AIG common stock. Starr alleges that rather than providing the liquidity support it offered to comparable financial institutions, Defendant ("the Government")1 exploited AIG's vulnerable financial position by becoming a controlling lender and controlling shareholder of AIG in September 2008. According to Starr, the Government took control of AIG so that it could use the corporation and its assets to provide a "backdoor bailout" to other financial institutions. In so doing, Starr alleges that the Government took AIG's property, including 562,868,096 shares of AIG common stock, without due process or just compensation.
On November 21, 2011, Starr filed a complaint in this Court against the United States, as well as a complaint in the U.S. District Court for the Southern District of New York against the Federal Reserve Bank of New York ("FRBNY"). See 1:11-cv-08422 (PAE). Starr subsequently filed an amended complaint in this Court on January 31, 2012, alleging violations of the Due Process, Equal Protection, and Takings Clauses of the United States Constitution, as well as an illegal exaction claim.2 Starr asserts allegations of coercion, misrepresentation, and discrimination in support of its constitutional and illegal exaction claims, but not as free-standing tort allegations. Starr seeks damages from the Government of at least $25 billion based upon the alleged market value of the 562,868,096 shares of AIG common stock as of January 14, 2011, the date on which the Government ultimately received the shares.
Starr brings its claims individually and on behalf of a class of others similarly situated, pursuant to Rule of the Court ("RCFC") 23, and derivatively on behalf of AIG, pursuant to RCFC 23.1. Starr is a privately held Panama corporation, which is, and was at all relevant times, a shareholder of AIG common stock. AIG is a Delaware corporation. In an order dated February 10, 2012, the Court joined Nominal Defendant,AIG as a necessary party pursuant to RCFC 19(a).3 See Starr Int'l Co. v. United States, 103 Fed. Cl. 287 (2012).
On March 1, 2012, counsel for the Government filed a motion pursuant to RCFC 12(b)(1) and 12(b)(6), requesting the Court to dismiss Starr's Complaint for lack of subject matter jurisdiction and for failure to state a claim upon which relief can be granted. Counsel for AIG and Starr filed briefs in response on March 26, 2012 and March 29, 2012, respectively, and counsel for the Government filed a reply on April 26, 2012. The Court held oral argument on the Government's motion to dismiss on June 1, 2012 at the National Courts Building in Washington, DC.4
After considering the parties' filings and oral presentations, the Court grants in part and denies in part the Government's motion to dismiss. The Court grants the Government's RCFC 12(b)(1) motion as to: (i) any Due Process claims not characterized as illegal exactions; and (ii) any Equal Protection claims. For the time being, the Court defers the issue of whether Starr adequately pled its demand on AIG's board or the futility of such a demand, as required by RCFC 23.1. The Court denies the remainder of the Government's motion challenging subject matter jurisdiction. The Court grants the Government's RCFC 12(b)(6) motion as to: (i) Starr's takings claim based on the Government's conversion of its preferred stock to common stock, insofar as Starr alleges the taking of the same equity interest more than once; and (ii) Starr's use of the rough proportionality test articulated in Dolan v. City of Tigard, 512 U.S. 374 (1994). The Court denies the Government's RCFC 12(b)(6) motion in all other respects.
The Government actions at issue arose because AIG found itself in a liquidity crisis in the summer of 2008. To understand the cause of AIG's liquidity issues—and the Government's alleged contribution to those issues—the Court provides background regarding AIG's business related to derivatives, and, in particular, credit default swaps ("CDSs"). The following facts, including the background on AIG's CDS business, are drawn from Starr's Complaint. For purposes of this motion to dismiss, the Court accepts as true all of the allegations in Starr's Complaint.
Starting in the 1980s, a wholly-owned subsidiary of AIG, AIG Financial Products ("AIGFP") began entering into contracts called derivatives, whereby one party in effect paid a fee to the other party to take on the risk of a business transaction. In 1998, AIGFP expanded this business to include an early form of what has become known as a "credit default swap." A CDS is a contract that functions like an insurance policy for debt securities instruments. In exchange for payments over time by a client, or "counterparty," the party writing the CDS is obligated to pay the counterparty the par value of the debt instrument in the event the instrument defaults. The party writing the CDS then succeeds to the counterparty's interest in the debt instrument.
The securities referenced by the CDSs written by AIGFP included collateralized debt obligations ("CDOs"). A CDO is a complex investment product typically backed by a pool of fixed-income assets. The collateral backing of a CDO can consist of various types of assets, including asset-backed securities ("ABSs"). Residential mortgage-backed securities were a common type of ABS used to form CDOs. In December 2005, AIGFP executives determined that writing CDSs on CDOs backed by subprime mortgage debt was too risky, and AIGFP stopped writing such CDSs; however, the CDSs AIGFP had already written remained on its books.
In writing CDSs referencing CDOs, AIGFP took on two types of risk: credit risk and collateral risk. If any CDO defaulted, i.e., could no longer meet its obligation to pay interest to holders of the securities, AIG was responsible for paying the remainder of the CDO's obligation. This was the credit risk. In some cases, AIG was required to post collateral in connection with a CDS as an assurance that it would be able to perform its obligation in the event of a default. Many of AIGFP's CDS contracts contained provisions requiring AIGFP to post cash collateral if AIGFP's credit rating fell or if the valuation of the underlying CDO fell below a certain threshold. This was the collateral risk.
Beginning in 2007, AIGFP's CDS counterparties started to claim that the value of the underlying CDOs was falling precipitously and to make increasingly large collateral calls on AIGFP. Those calls increased in the spring and summer of 2008. At the same time, many of AIG's assets were relatively illiquid and difficult to sell quickly. Due to the confluence of increased collateral calls and AIG's inability to sell certain assets, AIG faced a "liquidity squeeze" beginning in July 2008 and continuing into September 2008. Compl. ¶ 40. The following is the account, as alleged by Starr, of the Government's discriminatory response to AIG's financial difficulties.
To address its liquidity issues, Starr "repeatedly" sought access to the Federal Reserve's discount window.5 Id. ¶ 42. While the Government provided such access to other domestic and foreign institutions, it withheld access to the discount window, as well as other forms of liquidity assistance, from AIG. Over the weekend of September 13-14, 2008, in addition to continuing to seek access to the discount window, AIG attempted to identify a private-sector solution to its liquidity issues. During that time, the Government "discouraged" non-U.S. investors from participating in a private-sector solution to AIG's liquidity needs. Id. ¶ 49.
On September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. That same day, the Government brokered talks among a consortium of banks in an attempt to arrange private financing for AIG. Those talks ultimately failed. Later that afternoon, the three largest rating agencies, Moody's, S&P, and Fitch Ratings Services, downgraded AIG's long-term credit rating. At that point, AIG faced possible bankruptcy as it would no longer have liquidity sufficient to meet the...
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