The appeal considered whether a breach of fiduciary duty cause of action could be brought against the Federal Reserve Bank of New York (“FRBNY”) over its rescue of American International Group, Inc. (“AIG”) during the fall 2008 financial crisis. The plaintiff-appellant, Starr International Co., Inc., (“Starr”), commenced this suit in the Southern District of New York alleging direct and derivative claims against FRBNY for breach of fiduciary duty and for aiding and abetting AIG’s officers in breaching their fiduciary duties. The district court dismissed the suit for two reasons: (1) Starr did not plead adequately in accordance with Rule 12(b)(6) that FRBNY was a fiduciary to AIG under Delaware law, and (2) Delaware fiduciary duty law is preempted and does not apply to the challenged actions. Starr, 906 F. Supp. 2d at 214-15, 252. Starr appealed.
Of central importance in this case were the facts that Starr was a principal shareholder in AIG, and, in 2008, AIG faced liquidity stress during the financial crisis because of collateral calls, Lehman Brothers’ bankruptcy, and AIG’s downgraded credit rating. As a result, to avoid bankruptcy, AIG entered into a rescue arrangement with FRBNY. As one of twelve regional federal reserve banks, FRBNY conducts important governmental functions regarding the general fiscal duties of the United States.
The arrangement between AIG and FRBNY provided a credit facility from FRBNY of $85 billion at an initial interest rate of 14.5% and required AIG to give the federal government 80% interest in AIG common stock to be held in trust. After the deal was made, Edward Liddy, who was alleged to have been under control of FRBNY, replaced the existing AIG CEO. In its pleadings, Starr alleged that FRBNY caused a special vehicle called Maiden Lane III to be used to purchase $62 billion in assets from AIG credit default swap counterparts at full par value and challenged FRBNY’s involvement in the trust operations that held AIG common stock.
The Second Circuit held that state fiduciary duty law is preempted by federal common law; therefore, Starr did not pled a plausible claim under Rule 12(b)(6), and the court dismissed the complaint. The court reasoned that Delaware fiduciary duty law did not apply to FRBNY’s rescue activities because of the federal interests at stake, which would have been compromised by the application of state law. In fact, the court looked to Supreme Court precedent and concluded that displacement of state law by federal common law occurs in areas of “uniquely federal interests” when “a ‘significant conflict’ exists between an identifiable ‘federal policy or interest and the [operation] of state law.’” Boyle v. United Techs. Corp., 487 U.S. 500, 504-07 (1988). The court reasoned that if FRBNY were a fiduciary of AIG under Delaware law, that private duty would be in significant and direct conflict with FRBNY’s obligation to act in the public interest as a fiscal agent of the United States and to take action in unusual and exigent circumstances. The court affirmed the judgment of the district court and granted FRBNY’s motion to dismiss Starr’s complaint.
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742 F.3d 37 (2d Cir. 2014)