12-5022-cv
Starr International Co., Inc. v. Federal Reserve Bank of New York



                                In the
          United States Court of Appeals
                     For the Second Circuit
                                ________

                          AUGUST TERM, 2013

                     ARGUED: SEPTEMBER 17, 2013
                     DECIDED: JANUARY 29, 2014

                            No. 12-5022-cv

     STARR INTERNATIONAL COMPANY, INC., INDIVIDUALLY AND
DERIVATIVELY ON BEHALF OF AMERICAN INTERNATIONAL GROUP, INC.,
                       Plaintiff-Appellant.

                                   v.

                FEDERAL RESERVE BANK OF NEW YORK,
                        Defendant-Appellee,

                                   and

AMERICAN INTERNATIONAL GROUP, INC., A DELAWARE CORPORATION,
                 Nominal Defendant-Appellee.
                         ________

Before: WALKER, LIVINGSTON, and CHIN, Circuit Judges.
                            ________

     Starr International Co. (“Starr”) appeals from the judgment of
the United States District Court for the Southern District of New
York (Paul A. Engelmayer, District Judge), dismissing its claims
2                                                      No. 12-5022-cv

against the Federal Reserve Bank of New York (“FRBNY”) for
breach of fiduciary duty in its rescue of American International
Group, Inc. (“AIG”) during the fall 2008 financial crisis. Starr Int’l
Co. v. Fed. Reserve Bank of N.Y., 906 F. Supp. 2d 202 (S.D.N.Y. 2012).
We agree with the district court that because of the uniquely federal
interests at stake in stabilizing the national economy, state fiduciary
duty law does not apply to FRBNY’s rescue activities in this case
and that it is preempted and replaced by federal common law. We
thus AFFIRM the dismissal of Starr’s complaint.
                              ________

                   DAVID BOIES (Robert J. Dwyer, Boies, Schiller &
                   Flexner LLP, New York, NY, and John L.
                   Gardiner, Skadden, Arps, Slate, Meagher & Flom
                   LLP, New York, NY, on the brief), Boies, Schiller &
                   Flexner LLP, Armonk, NY, for Plaintiff-Appellant.

                   JOHN S. KIERNAN (Gary W. Kubek, Jennifer E.
                   Spain, Nicholas C. Tompkins, David B. Noland,
                   Thomas C. Baxter, Jr., Shari Leventhal, and
                   Meghan McCurdy, Federal Reserve Bank of New
                   York, on the brief), Debevoise & Plimpton LLP,
                   New York, NY, for Defendant-Appellee.

                   JOSEPH S. ALLERHAND (Stephen A. Radin and
                   Jamie L. Hoxie, on the brief), Weil, Gotshal &
                   Manges LLP, New York, NY, for Nominal
                   Defendant-Appellee.
                              ________

JOHN M. WALKER, JR., Circuit Judge:

      Starr International Co. (“Starr”) appeals from the judgment of
the United States District Court for the Southern District of New
York (Paul A. Engelmayer, District Judge), dismissing its claims
against the Federal Reserve Bank of New York (“FRBNY”) for
breach of fiduciary duty in its rescue of American International
3                                                        No. 12-5022-cv

Group, Inc. (“AIG”) during the fall 2008 financial crisis. Starr Int’l
Co. v. Fed. Reserve Bank of N.Y., 906 F. Supp. 2d 202 (S.D.N.Y. 2012).
We agree with the district court that because of the uniquely federal
interests at stake in stabilizing the national economy, state fiduciary
duty law does not apply to FRBNY’s rescue activities in this case
and that it is preempted and replaced by federal common law. We
thus AFFIRM the dismissal of Starr’s complaint.

                           BACKGROUND
       Because the district court dismissed Starr’s claims on the
pleadings, we must accept the complaint’s factual allegations as true
for the purposes of this appeal. See DiFolco v. MSNBC Cable L.L.C.,
622 F.3d 104, 110-11 (2d Cir. 2010). According to the complaint, AIG
faced increasing liquidity stress during the national financial crisis in
the fall of 2008, primarily due to collateral calls by AIG’s
counterparties on contracts known as “credit default swaps”
provided by AIG that function as insurance on debt securities
instruments. AIG’s liquidity problems worsened after Lehman
Brothers Holdings Inc. filed for bankruptcy on September 15, 2008,
and the three largest rating agencies downgraded AIG’s credit
rating on the same day.
       On September 16, 2008, after AIG told the federal government
that it might have to file for bankruptcy, FRBNY offered AIG a
rescue arrangement that included a credit facility from FRBNY of
$85 billion at an initial interest rate of 14.5%, but required AIG to
give the federal government approximately 80% interest in AIG
common stock to be held in a trust (“the Trust”). With no other
alternatives besides bankruptcy available, AIG’s directors and
officers accepted the deal. On September 18, AIG’s directors
replaced the company’s existing CEO with Edward Liddy, whom
Starr alleges to have been under the control of FRBNY and thereby
not acting solely in the interests of AIG’s shareholders. On
September 22, AIG and FRBNY executed the formal agreement (“the
Credit Agreement”) memorializing the above rescue arrangement.
      At the time of the Credit Agreement, Starr was AIG’s
principal shareholder. Because Starr is time-barred from raising any
4                                                         No. 12-5022-cv

claim for breach of fiduciary duty for actions taken before
November 21, 2008, Starr’s claims focus on subsequent actions by
FRBNY in connection with the rescue deal. First, in late November
and December of 2008, FRBNY caused a special vehicle called
Maiden Lane III—funded by both AIG and FRBNY—to be used to
purchase $62 billion in assets from AIG credit default swap
counterparties at full par value.1 Starr alleges that Maiden Lane III
effectively provided the counterparties with “backdoor bailouts” (to
the detriment of AIG) because many of the counterparties would
have been willing to settle AIG’s obligations for less than par value.
      Second, Starr also challenges FRBNY’s actions involving the
Trust. The Credit Agreement required AIG to issue Series C
Preferred Stock convertible to nearly 80% of AIG common stock to
the Trust, which was created on January 16, 2009, with the U.S.
Treasury named as the sole beneficiary. On March 4, 2009, AIG
issued the required Series C Preferred Stock to the Trust. Starr
contends that the conversion of the Series C Preferred Stock to
common stock was subject to approval of the other shareholders,
and that after the shareholders rejected a proposal to increase the
number of common stock shares on June 30, 2009, their vote was
circumvented through a 20:1 reverse stock split (for which the Trust,
as controlling shareholder, could vote).2 In voting for the reverse
stock split, the trustees were required to act in the best interests of
the Trust beneficiary, the U.S. Treasury, which is a distinct entity
from FRBNY. On January 14, 2011, over eighteen months later, the
Treasury’s shares were exchanged for AIG common stock.
    1
      Maiden Lane III, like the original Credit Agreement, was approved
by AIG Board members who were elected before the financial crisis.
    2 The number of authorized, but unissued, shares of common stock had

to be increased to enable the conversion of the Trust’s Series C preferred
shares to common shares. This could be accomplished either by allowing
the Trust’s preferred shares to be converted to common shares (which had
to be approved by existing common stock shareholders), or by a reverse
stock split that decreased the number of issued common shares while
leaving the total number of authorized shares the same (which could be
approved by all shareholders, including the Trust).
5                                                            No. 12-5022-cv

      Starr brought this suit on November 21, 2011, 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, as well as constitutional claims that are not at issue
in this appeal.3 On November 16, 2012, in a well-reasoned and
thorough opinion, Judge Engelmayer granted FRBNY’s motion to
dismiss under Rule 12(b)(6) on the independent bases that (1) Starr
did not adequately plead that FRBNY was a fiduciary to AIG under
Delaware law and (2) because FRBNY is a federal instrumentality
charged with preserving the stability of the national economy,
Delaware fiduciary duty law (including the state law cause of action
for aiding and abetting breaches of state law fiduciary duty) is
preempted and does not apply to the challenged actions. Starr, 906
F. Supp. 2d at 214-15, 252. Starr timely appealed.

                              DISCUSSION
        We review de novo a district court’s dismissal of a complaint
under Rule 12(b)(6), accepting the complaint’s factual allegations as
true and drawing all reasonable inferences in the plaintiff’s favor.
DiFolco, 622 F.3d at 110-11. The complaint must “state a claim to
relief that is plausible on its face,” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570 (2007), and “plead[] factual content that allows the court to
draw the reasonable inference that the defendant is liable for the
misconduct alleged,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
    Congress has specified that federal reserve banks such as
FRBNY may be sued, 12 U.S.C. § 341, and that such suits “shall be
    3
      Starr’s takings claims were withdrawn and dismissed without
prejudice, and its equal protection and due process claims were dismissed
with prejudice. Starr does not appeal the dismissal of these constitutional
claims against FRBNY. On the same day that this action was filed against
FRBNY in the Southern District of New York, Starr also filed a separate
lawsuit in the Court of Federal Claims raising constitutional claims
against the United States for its role in the AIG bailout. The Court of
Federal Claims has partially denied the government’s motion to dismiss.
Starr Int’l Co. v. United States, 106 Fed. Cl. 50, reconsideration denied, 107
Fed. Cl. 374 (2012).
6                                                        No. 12-5022-cv

deemed to arise under the laws of the United States,” id. § 632. Starr
argues that in this case Delaware fiduciary duty law provides the
rule of decision, and that FRBNY is accordingly liable for its rescue
activities under state law. But the Supreme Court has held that in
areas of “uniquely federal interests,” “state law is pre-empted and
replaced, where necessary, by federal law of a content prescribed
(absent explicit statutory directive) by the courts—so-called ‘federal
common law.’” Boyle v. United Techs. Corp., 487 U.S. 500, 504 (1988)
(internal quotation marks omitted). Because of the uniquely federal
interests at stake in FRBNY’s rescue of AIG, at the height of the 2008
financial crisis, which would be compromised by the application of
state fiduciary duty law, we hold that federal common law preempts
state fiduciary duty law and provides the rule of decision.
       FRBNY, as one of the twelve regional federal reserve banks, is
a “fiscal agent[] of the United States.” 12 U.S.C. § 391; see generally
Bd. of Governors of the Fed. Reserve Sys., The Federal Reserve System:
Purposes & Functions 6-11 (9th ed. 2005). Federal reserve banks have
shareholders: national banks must buy stock in the federal reserve
bank of their district, and state banks may also apply for
membership. 12 U.S.C. §§ 222, 321. But federal reserve banks “are
not operated for the profit of shareholders”; rather, they “were
created and are operated in furtherance of the national fiscal policy.”
Fed. Reserve Bank of Bos. v. Comm’r of Corps. & Taxation of the
Commonwealth of Mass., 499 F.2d 60, 62 (1st Cir. 1974); see 12 U.S.C.
§ 289 (requiring federal reserve banks to transfer net earnings to the
U.S. Treasury). Because federal reserve banks “conduct important
governmental functions regarding” matters including the “general
fiscal duties of the United States,” they are “instrumentalities of the
federal government.” Fed. Reserve Bank of St. Louis v. Metrocentre
Improvement Dist. # 1, City of Little Rock, Ark., 657 F.2d 183, 185-86
(8th Cir. 1981), aff’d mem., 455 U.S. 995 (1982); see also Fasano v. Fed.
Reserve Bank of N.Y., 457 F.3d 274, 281-82 (3d Cir. 2006) (noting
“strong arguments” in favor of finding federal reserve banks to be
federal instrumentalities); Fed. Reserve Bank of Bos., 499 F.2d at 62;
James v. Fed. Reserve Bank of N.Y., 471 F. Supp. 2d 226, 240 (E.D.N.Y.
2007).
7                                                          No. 12-5022-cv

       FRBNY claims that the emergency rescue activities at issue
here fell within its statutory authority. Section 13(3) of the Federal
Reserve Act grants federal reserve banks the power to provide
discretionary emergency loans to nonmembers such as AIG in
“unusual and exigent circumstances” when such entities are “unable
to secure adequate credit accommodations from other banking
institutions.” 12 U.S.C. § 343. Before extending emergency credit, a
federal reserve bank must determine that “failure to obtain such
credit would adversely affect the economy.” 12 C.F.R. § 201.4(d).
Under 12 U.S.C. § 341, FRBNY also has “incidental powers” needed
to carry out its emergency lending activities.4
       Starr agrees that state fiduciary duty law may not be applied
to FRBNY when it exercises these statutory powers. But while Starr
devotes much of its argument to the contention that FRBNY
exceeded its statutory authority through its unprecedented rescue
activities, we need not reach this issue to determine whether state
fiduciary duty law applies. As the district court noted, “Starr has not
identified any case that limits the scope of preemption to the scope
of a federal instrumentality’s lawful operation, or that makes state
law inherently available to police excesses of authority by federal
actors.” Starr, 906 F. Supp. 2d at 242.
       In the seminal McCulloch v. Maryland, the Supreme Court
rejected a state’s efforts to tax a federal instrumentality (like FRBNY
here), noting that “[t]he states have no power, by taxation or
otherwise, to retard, impede, burden, or in any manner control” such
instrumentalities. 17 U.S. (4 Wheat.) 316, 436 (1819) (emphasis
added). More recently, the Supreme Court has specified that

    412 U.S.C. § 341 grants federal reserve banks “such incidental powers
as shall be necessary to carry on the business of banking.” We have
interpreted identical language from the National Bank Act, 12 U.S.C. § 24,
to refer to activities “convenient [and] useful in connection with the
performance of” an express power. Sec. Indus. Ass’n v. Clarke, 885 F.2d
1034, 1044, 1049 (2d Cir. 1989) (alteration in original) (internal quotation
marks omitted) (quoting Arnold Tours, Inc. v. Camp, 472 F.2d 427, 432 (1st
Cir. 1972)).
8                                                         No. 12-5022-cv

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, 487 U.S. at 504, 507 (alteration in original)
(quoting Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68 (1966)).
“[T]he essence of this test is ‘whether the relevant federal interest
warrants displacement of state law.’” New York v. Nat’l Serv. Indus.,
Inc., 460 F.3d 201, 207 (2d Cir. 2006) (quoting Empire Healthchoice
Assurance, Inc. v. McVeigh, 547 U.S. 677, 692 (2006)).
       For example, the Supreme Court has held that the liability of
independent contractors designing helicopters for the federal
government was an area of uniquely federal concern, and that
imposing state tort law would conflict with this federal policy, even
though (as here) the government was not a party to the dispute.
Boyle, 487 U.S. at 507-08. In contrast, when there was no such
conflict, the Supreme Court found it unnecessary to create
“nationwide standards favoring claims of the United States” in the
administration of Small Business Administration (SBA) and Farmers
Home Administration (FHA) loans when “state commercial codes
‘furnish convenient solutions in no way inconsistent with adequate
protection of the federal interest[s].’” United States v. Kimbell Foods,
Inc., 440 U.S. 715, 729 (1979) (alteration in original) (quoting United
States. v. Standard Oil Co., 332 U.S. 301, 309 (1947)).
      In this case, Delaware fiduciary duty law cannot be applied to
FRBNY’s rescue activities consistently with adequate protection of
the federal interests at stake in stabilizing the national economy. If
FRBNY were a fiduciary of AIG under Delaware law,5 it would have
an “unyielding . . . duty to protect the interests of the corporation
and to act in the best interests of its shareholders.” Cede & Co. v.
Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993), modified on other

    5
     The district court concluded that Starr did not adequately plead that
FRBNY was a fiduciary to AIG under the standards of Delaware law.
Starr, 906 F. Supp. 2d at 215-230. Because we conclude that Delaware
fiduciary duty law does not apply to the circumstances presented in this
case, we need not reach this issue.
9                                                      No. 12-5022-cv

grounds, 636 A.2d 956 (Del. 1994). This private duty would present a
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” when its failure to act
“would adversely affect the economy.” 12 U.S.C. § 343; accord 12
C.F.R. § 201.4(d).
       This suit challenges the extraordinary measures taken by
FRBNY to rescue AIG from bankruptcy at the height of the direst
financial crisis in modern times. In light of the direct conflict these
measures created between the private duties imposed by Delaware
fiduciary duty law and the public duties imposed by FRBNY’s
governing statutes and regulations, we hold that in this suit, state
fiduciary duty law (including the state law cause of action for aiding
and abetting breaches of state law fiduciary duty) is preempted by
federal common law. The district court thus correctly concluded that
Starr has not pled a plausible claim.

                           CONCLUSION
       For the reasons stated above, we AFFIRM the judgment of the
district court granting FRBNY’s motion to dismiss Starr’s complaint.
