Starr Int'l Co. v. United States

• Decision Date: 09 May 2017
• Docket Number: 2015-5103, 2015-5133
• Citation: 856 F.3d 953
• Parties: STARR INTERNATIONAL COMPANY, INC., in its own right and on behalf of two classes of others similarly situated, Plaintiff–Appellant v. UNITED STATES, Defendant–Cross–Appellant American International Group, Inc., Defendant
• Court: U.S. Court of Appeals — Federal Circuit

856 F.3d 953

STARR INTERNATIONAL COMPANY, INC., in its own right and on behalf of two classes of others similarly situated, Plaintiff–Appellant

v. UNITED STATES, Defendant–Cross–AppellantAmerican International Group, Inc., Defendant

2015-5103, 2015-5133

United States Court of Appeals, Federal Circuit.

Decided: May 9, 2017

David Boies , Boies, Schiller & Flexner, LLP, Armonk, NY, argued for plaintiff-appellant. Also represented by Anthony T. Kronman ; Robert J. Dwyer , Alanna C. Rutherford , New York, NY; Amy J. Mauser , Washington, DC; Gregory S. Bailey , Ryan Stoll , Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, IL; John Gardiner , New York, NY; Charles Fried , Cambridge, MA.

Mark B. Stern , Appellate Staff, Civil Division, United States Department of Justice, Washington, DC, argued for defendant-cross-appellant. Also represented by Jeffrey Eric Sandberg , Karen Schoen , Benjamin C. Mizer .

John S. Kiernan , Debevoise & Plimpton LLP, New York, NY, for amicus curiae Federal Reserve Bank of New York. Also represented by Lindsay C. Cornacchia , Nicholas C. Tompkins ; Shari D. Leventhal , Meghan McCurdy , Federal Reserve Bank of New York, New York, NY.

Dennis M. Kelleher , Better Markets, Inc., Washington, DC, for amicus curiae Better Markets, Inc.

Before Prost, Chief Judge, Reyna and Wallach, Circuit Judges.

Opinion concurring-in-part and concurring-in-the-result filed by Circuit Judge Wallach.

Prost, Chief Judge.

Around September 2008, in the midst of one of the worst financial crises of the last century, American International Group, Inc. ("AIG") was on the brink of bankruptcy and sought emergency financing. The Federal Reserve Bank of New York ("FRBNY") granted AIG an $85 billion loan, the largest such loan to date. Central to this case, the United States ("Government") received a majority stake in AIG's equity under the loan, which the Government eventually converted into common stock and sold.

One of AIG's largest shareholders, Starr International Co., Inc. ("Starr"), filed this suit alleging that the Government's acquisition of AIG equity and subsequent actions relating to a reverse stock split were unlawful. The U.S. Court of Federal Claims ("Claims Court") held a trial on Starr's direct claims, for which Starr sought over $20 billion in relief on behalf of itself and other shareholders. The Claims Court ultimately held that the Government's acquisition of AIG equity constituted an illegal exaction in violation of § 13(3) of the Federal Reserve Act, 12 U.S.C. § 343, but declined to grant relief for either that adjudged illegal exaction or for Starr's reverse-stock-split claims. Starr appeals the denial of direct relief for its claims. The Government cross-appeals, arguing that Starr lacks standing to pursue its equity-acquisition claims directly or, alternatively, that the Government's acquisition of equity did not constitute an illegal exaction.

We conclude that Starr and the shareholders represented by Starr lack standing to pursue the equity-acquisition claims directly, as those claims belong exclusively to AIG. Because this determination disposes of the equity-acquisition claims, the other issues regarding the merits of those claims are rendered moot. We also conclude that the Claims Court did not err in denying relief for Starr's reverse-stock-split claims.

We therefore vacate the Claims Court's judgment that the Government committed an illegal exaction and remand with instructions to dismiss the equity-acquisition claims that seek direct relief. We affirm the judgment as to the denial of direct relief for the reverse-stock-split claims.

I. BACKGROUND ¹

The 2008 financial crisis exposed many of the major financial institutions in the United States to substantial liquidity risks. AIG was no exception.

This case relates to injuries that the Government allegedly inflicted on AIG and its shareholders, including Starr, in the process of saving AIG from bankruptcy.

A

AIG is a publicly traded corporation with various insurance and financial services businesses. Around 2007, it experienced a deteriorating financial condition due in part to a collapse of the housing market. Leading up to the 2008 financial crisis, AIG had become a major participant in various derivatives markets, including by guaranteeing a portfolio of credit-default-swaps ("CDSs") sold by one of its subsidiaries. These CDSs functioned like insurance policies for counterparties holding debt obligations, which in turn were often backed by subprime mortgages. When the value of mortgage-related assets declined during the 2008 financial crisis, counterparties demanded that AIG post additional cash collateral pursuant to terms of the CDSs or, in the event of a default, pay any remaining positions. By September 2008, AIG was also facing other financial challenges, including increased fund returns from securities lending, a significant decline in its stock price, the prospect of downgraded credit ratings, and difficulty obtaining additional funding. These factors contributed to mounting stress on AIG's liquidity.

The situation came to a head on Friday, September 12, 2008, when AIG informed the FRBNY that it had urgent liquidity needs estimated between $13 billion—$18 billion.² Over the weekend of September 13–14, AIG's liquidity needs ballooned to $45 billion, then to over $75 billion, threatening its very survival. On the morning of Monday, September 15, another major financial institution, Lehman Brothers, filed for bankruptcy, which made obtaining private funding even more difficult.

By the following day, the FRBNY—realizing that an AIG bankruptcy could have destabilizing consequences on other financial institutions and the economy—invoked § 13(3) of the Federal Reserve Act (or "the Act"), 12 U.S.C. § 343. That statutory provision allows the Federal Reserve Board, "[i]n unusual and exigent circumstances," to authorize a Federal Reserve Bank to provide an interest-bearing loan to a qualifying entity, "subject to such limitations, restrictions, and regulations as the [Federal Reserve Board] may prescribe." 12 U.S.C. § 343. Specifically, an entity receiving such loan must "indorse [ ] or otherwise secure[ ] [the loan] to the satisfaction of the Federal reserve bank" and show that it "is unable to secure adequate credit accommodations from other banking institutions."³ Id.

The Federal Reserve Board quickly approved a Term Sheet for an $85 billion loan under § 13(3) of the Act. In addition to setting forth an interest rate and various fees, the Term Sheet provided that the FRBNY would receive 79.9% equity in AIG.

That same day, September 16, AIG's Board of Directors ("AIG Board") met to consider the proposed Term Sheet. They discussed the pros and cons of accepting the loan, including the equity term. AIG's Chief Executive Officer ("CEO") at the time, Robert Willumstad, also conveyed to them "that the Secretary of the Treasury had informed him that as a condition to the [loan, he] would be replaced as [CEO]." J.A. 200031. According to the meeting minutes, all but one of the Directors expressed the view "that despite the unfavorable terms of the [loan, it] was the better alternative to bankruptcy for [AIG]." J.A. 200038. Over the single dissenting Director, the Board voted to approve the Term Sheet. The FRBNY then advanced money to AIG for its immediate liquidity needs, and Mr. Willumstad was replaced as CEO.

On September 22, 2008, AIG entered into a Credit Agreement memorializing the terms of the loan. The Agreement specified that the Government, through "a new trust established for the benefit of the United States Treasury" ("the Trust"), would receive the 79.9% equity in the form of preferred stock that would be convertible into common stock. J.A. 200212. This was the agreement through which the Government acquired AIG equity.⁴ The recited consideration for the equity was "$500,000 plus the lending commitment of [the FRBNY]." J.A. 200212. AIG issued the convertible preferred stock and placed it in the Trust in 2009.⁵

The $85 billion loan was, and remains, the largest § 13(3) loan ever granted. It is also the only instance in which the Government obtained equity as part of a § 13(3) loan.

At this time, AIG's common stock was listed on the New York Stock Exchange ("NYSE"). In the latter part of 2008, AIG's stock sometimes dipped below $5.00 per share, prompting the NYSE to remind AIG that the NYSE had a minimum share-price requirement of $1.00 per share. The NYSE advised that it would delist stocks that failed to meet the $1.00-per-share requirement after June 30, 2009. By early 2009, AIG's common stock was occasionally closing below $1.00 per share and was therefore at risk of being delisted.

On June 30, 2009, the same day as the NYSE dead-line, AIG held an annual shareholder meeting at which shareholders voted on a number of proposals to amend AIG's Restated Certificate of Incorporation. In relevant part, the AIG Board advised shareholders to approve two proposed amendments that would alter the pool of AIG common stock. The first proposed amendment required approval by a majority of the common shareholders (which excluded the Government at the time because it held preferred stock) and would nearly double the amount of authorized common stock from five billion shares to 9.225 billion shares. The proxy statement explained that this increase would "provide the [AIG] Board ... the ability to opportunistically raise capital, reduce debt and engage in other transactions the [AIG] Board ... deems beneficial to AIG and its shareholders." J.A. 201112.

The second proposed amendment was subject to a wider shareholder vote and would implement a reverse stock split at a ratio of 1:20 but would only affect the three billion issued shares out of the five billion authorized shares of common stock. The proxy statement asserted that "[t]he primary purpose of the reverse stock split [was] to increase the per share trading price of AIG Common Stock" and, accordingly, "help ensure...