AIG Fin. Prods. Corp. v. Arthurs (In re AIG Fin. Prods. Corp.)

660 B.R. 603

IN RE: AIG FINANCIAL PRODUCTS CORP., Debtor.

AIG Financial Products Corp., Plaintiff,American International Group, Inc., Intervening Plaintiff, v. Lee Arthurs, et al. Defendants.

Case No. 22-11309 (MFW) (Jointly Administered)

Adv. No. 23-50110 (MFW)

United States Bankruptcy Court, D. Delaware

Signed May 9, 2024

Kara Hammond Coyle, Michael S. Neiburg, Young Conaway Stargatt & Taylor LLP, Wilmington, DE, Zachary I. Shapiro, Alexander R. Steiger, Richards, Layton & Finger, P.A., Wilmington, DE, for Plaintiff AIG Financial Products Corp. Nicolas Jenner, Matthew B. McGuire, Landis Rath & Cobb LLP, Wilmington, DE, for Defendant Employee Plaintiffs.

Memorandum Opinion¹

Mary F. Walrath, United States Bankruptcy Judge

Before the Court is the Motion for Judgment on the Pleadings and Motion to Dismiss (the "Motion") filed by American International Group, Inc. ("AIG") and joined by AIG Financial Products Corporation ("the Debtor"). The Motion is opposed by the Defendants, a group of former top executives of the Debtor (the "Former Executives"). For the reasons stated below, the Court will deny the Motion.

I. FACTUAL BACKGROUND²

The Debtor is a wholly owned subsidiary of AIG. The Debtor was founded in 1987 as a joint venture between AIG and a group of Drexel Lambert investment bankers to allow AIG to access the capital markets and generate returns from trading in complex financial derivatives.³ The Debtor wrote credit protection through credit default swaps on mortgage-backed securities (also known as collateralized debt obligations) to the tune of hundreds of billions of dollars.

While working for the Debtor, the Former Executives participated in certain deferred compensation plans: the Deferred Compensation Plan (the "DCP"), the Special Incentive Plan (the "SIP"), and the 2008 Employee Retention Plan (the "ERP") (collectively, the "Compensation Plans"). Each of the Former Executives was a participant in the DCP and a number also participated in the SIP and the ERP.⁴ Under the Compensation Plans, the Former Executives were entitled to receive a portion of the Debtor's profits in annual bonuses, but some portion of that compensation was automatically deferred.⁵ The Former Executives could also elect to increase the amounts deferred.⁶ AIG was also a participant in the Compensation Plans and agreed to defer a portion of the Debtor's profits to which it was entitled.⁷ The Former Executives' deferred compensation was reflected on a ledger of their accounts but was not segregated from the Debtor's general funds nor held in trust for them.⁸ Absent any losses in a given year, the deferred compensation was to be paid to them over time in installments annually, starting in October of the next calendar year after the contribution to the plan was made.⁹ The Plan Participants' accounts were reduced by the amount of any losses suffered by the Debtor in excess of certain reserves, but the Debtor was required to restore those balances (with interest) from future profits pursuant to a plan to be proposed by its board of directors.¹⁰ The Debtor's obligation to restore the Former Executive's accounts was to expire on December 31, 2013, unless the Debtor's Board extended that deadline.¹¹ In the event of an insolvency or bankruptcy proceeding of the Debtor, the Compensation Plans provided that the Plan Participants had an unsecured claim for any amounts due to them under the Plans which was subordinated to all other claims against the Debtors.¹²

As a result of the financial crisis in the United States in 2008 and 2009, the Debtor was left owing tens of billions of dollars on its complex financial obligations and suffered a severe liquidity crisis.¹³ To avoid the massive losses that would be realized if the Debtor were forced to liquidate its holdings immediately, AIG obtained loans of almost $100 billion from the Federal Reserve Bank.¹⁴ With those funds AIG infused the Debtor with $65 billion through a revolving credit facility extended by another AIG subsidiary, AIG Funding.¹⁵ The extension of this "loan" allowed the Debtor to liquidate its obligations over time. With that financial assistance, the Debtor became cash flow positive and balance sheet solvent over time (or at least represented that it was).¹⁶ Notwithstanding representations that it was solvent,¹⁷ the Debtor did not restore the amounts of deferred compensation due the Former Executives under the various plans nor credit any deferred compensation to the Former Executives' accounts. As a result, in December 2019, the Former Executives sued the Debtor in Connecticut asserting they were owed in excess of $194 million in deferred compensation.¹⁸

II. PROCEDURAL BACKGROUND

On December 14, 2022, the Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code.¹⁹ On the same day, it filed a proposed plan of reorganization and related disclosure statement.²⁰ The Plan provided for a reorganization of the Debtor by converting the claim of its parent, AIG, to equity and paying a pro rata distribution of $1 million to the Former Executives if their class accepted the plan.²¹

On January 13, 2023, the Former Executives filed a motion asking the Court to dismiss the bankruptcy case, or to abstain, asserting that the case was filed in bad faith and would result in continuing loss to the estate without a reasonable likelihood of rehabilitation.²² After briefing and an evidentiary hearing, the Court denied the motion in an opinion and order dated May 10, 2023.²³

In the interim, on February 17, 2023, the Debtor filed a complaint against the Former Executives (the "Complaint").²⁴ Count II of the Complaint requests a declaratory judgment that the Former Executives' claims under the Compensation Plans are subordinated to AIG's claim pursuant to a provision in the Compensation Plans as enforced under section 510(a) of the Bankruptcy Code. The Court approved a stipulation allowing AIG to intervene as a plaintiff.²⁵

The Former Executives filed an answer, a counterclaim, and several cross-claims against AIG seeking a determination that their claims are senior to AIG's claim.²⁶ Those claims include recharacterization or equitable subordination of AIG's claim, as well as asserting breach of contract and tort claims. The Debtor filed an Answer to the counterclaim against it on June 7, 2023.²⁷

AIG filed a Motion to Dismiss and for Judgment on the Pleadings on July 28, 2023.²⁸ The Debtor filed a Joinder to AIG's Motion.²⁹ The Motion seeks a judgment in favor of the Plaintiffs on Count II of the Complaint and seeks dismissal of the Former Executives' counterclaim and cross-claims. The Motion has been fully briefed and is ripe for decision.³⁰

III. JURISDICTION

The Former Executives assert that while the Court has jurisdiction over their counterclaim and cross-claims, those claims are non-core.³¹ The Court concludes, however, that it has subject matter jurisdiction over the complaint, counterclaim, and cross-claims because they are core claims concerning the allowance and priority of claims against the estate.³²

The Former Executives do not consent to a final order being entered.³³ It is not necessary to decide this issue, however, because the Court does have authority to enter orders on preliminary matters to the extent they do not constitute a final adjudication of a matter over which the Court does not have constitutional authority to enter a final order.³⁴

IV. DISCUSSION

A. Standard of Review

1. Rule 12(b)(6)³⁵

AIG bases its Motion to Dismiss on Rule 12(b)(6), which provides for dismissal for "failure to state a claim upon which relief can be granted."³⁶ Under Rule 12(b)(6), the complaint "does not need detailed factual allegations, [but] a plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do."³⁷

To survive a motion to dismiss, the complaint must contain sufficient factual matter, accepted as true, "to state a claim to relief that is plausible on its face."³⁸ Two "working principles" underlie this pleading standard:

First, the tenet that a court must accept a complaint's allegations as true is inapplicable to threadbare recitals of a cause of action's elements, supported by mere conclusory statements. Second, determining whether a complaint states a plausible claim is context specific, requiring the reviewing court to draw on its experience and common sense.³⁹

Under this standard, a complaint must nudge claims "across the line from conceivable to plausible."⁴⁰ The court must draw all reasonable inferences in favor of the plaintiff,⁴¹ and the movant "bears the burden to show that the plaintiff's claims are not plausible."⁴²

In weighing a motion to dismiss, the Third Circuit instructs courts to follow a three-part analysis. "First, the court must 'tak[e] note of the elements a plaintiff must plead to state a claim.' "⁴³ Second, the court must separate the factual and legal elements of the claim, accepting all of the complaint's well-pled facts as true and disregarding any legal conclusions.⁴⁴ Third, the court must determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief.⁴⁵ After conducting this analysis, the court may conclude that a claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the alleged misconduct.⁴⁶

2. Rule 12(c)⁴⁷

Rule 12(c) governs motions for judgment on the pleadings and applies the same standard as Rule 12(b)(6).⁴⁸ A 12(c) motion differs from a 12(b)(6) motion, however, in that the movant must establish "that no material issue of fact remains to be resolved and that [it] is entitled to judgment as a matter of law."⁴⁹ Further, the allegations that must be accepted as true depends on which party is the moving party. "In the situation in which the plaintiff moves for judgment...