This post is a guest blog from Brian R. Biggie, Esq. and Sharon Angelino, Esq., attorneys with the law firm of Goldberg Segalla LLP. If you would like to provide an article, abstract or thoughts for distribution on the PLUS Blog, please contact PLUS at info@plusweb.org.
Not unexpectedly, the AIG meltdown has given rise to a series of lawsuits, including a derivative action seeking to hold AIG’s former directors and officers liable for their alleged malfeasance. (See American International Group v. Greenberg et. al., Court of Chancery of Delaware - C.A. No. 769-VCS).
Previously, the trial court had issued a decision permitting the derivative action to proceed against a number of “inner circle” defendants, including Maurice Greenberg, Howard Smith, Edward Mathews and Thomas Tizzio. The trial court, however, dismissed claims asserted against a series of managers and employees based upon a lack of personal jurisdiction. [(See American International Group v. Greenberg et. al., 965 A.2d 763 (Del. Ch. 2009)].
Recently, the trial court was again confronted with a motion to dismiss. This time however, the motion was made by alleged co-conspirators Marsh & McLennan Companies Inc., ACE and Gen Re. [(See American International Group v. Greenberg et. al., -- A.2d -- (Del. Ch. 2009)]. The First Amended Combined Complaint alleges that Marsh & McLennan and ACE as well as certain related subsidiaries engaged in a “bid rigging” conspiracy in order to “carve up” the market for certain types of insurance. This was allegedly done by AIG and ACE paying Marsh & McLennan “contingent commissions” and in exchange, those companies would become “preferred markets” to whom Marsh would steer business. It was also alleged that Marsh and its co-conspirators engaged in a rigged bidding process where the winner was pre-determined thereby allowing the insurer to charge rates “free from market pressure.”
With regard to GenRe, it was alleged that AIG and GenRe engaged in a complicated a fake reinsurance sale for the purpose of artificially inflating AIG’s loss reserves. In short, AIG appeared to be selling GenRe $500 Million in reinsurance. However, no reinsurance was actually sold. Instead, AIG paid GenRe $5 Million to facilitate the fake transaction and allow AIG to report a $500 Million increase in its insurance reserves and premiums.
Marsh & McLennan, ACE and GenRe argued that the plaintiffs could not seek recovery from alleged co-conspirators for damages sustained as a result of AIG’s own illegal conduct. Initially, the trial court noted that AIG could pursue recovery from its insiders for illegal and detrimental behavior. To hold otherwise “would be to let fiduciaries immunize themselves through their own wrongful, disloyal acts.” Id.However, the trial court held that such potential liability did not extend to third-parties such as Marsh, ACE and GenRe.
In granting defendants’ motion to dismiss, the court relied upon the principle of “in pari delicto.” Under this doctrine, courts “will not extend aid to either of the parties to a criminal act or listen to their complaints against each other but will leave them where their own act has placed them.” Id.In short, this doctrine recognizes that there is no societal interest in providing an accounting between wrongdoers.
In light of the Complaint’s express allegations that the bid-rigging and fake reinsurance conspiracies involved knowing participation in illegal conduct by AIG officials charged with engaging in such conduct, AIG is in pari delicto with the co-conspirators. Therefore, the court held that AIG is barred from bringing a claim against third-parties, absent an applicable exception.
The trial court soundly dismissed plaintiffs’ efforts to craft an exception to the doctrine of in pari delicto, noting repeatedly that plaintiffs’ exceptions would essentially eviscerate this doctrine and its consequences. The court held that this action presented the type of situation where an accounting of fault of co-conspirators would be inefficient and force the court to engage in an effort to determine who “won” or “lost” from a criminal conspiracy. Moreover, abdicating the application of in pari delicto could create a disincentive for a corporation to police itself.
In the end, the court held that there was no credible argument allowing AIG the right to recover from co-conspirators. Accordingly, where officers or managers act in illegal fashion to increase corporate profits, the corporation is responsible to innocent third-parties. AIG can certainly pursue claims against its own directors and officers for any resulting harm; however, the co-conspirators will be left as they stand.
This decision, and by extension, its application of the in pari delicto doctrine, precludes any recovery against a party that may very well have been directly involved in a scheme that causes another corporation to sustain substantial losses. The application of this principle leads to an interesting distinction when considering director and officer actions.
For the purposes of individual liability, the corporate entity can pursue a claim against a director or officer that caused the company to sustain losses through illegal activities. In that situation, the corporation and officer are separate, with the corporation having a direct claim based upon the actions taken by the officer, even if such actions benefited the corporation, i.e., higher loss reserves or stock prices.
Unlike individual liability, with regard to liability to thirdparties, the corporation does not have the benefit of this separation. The same illegal actions that allow a direct claim against an officer are attributed to the corporation for the purposes of the in pari delicto doctrine. Therefore, while segments of AIG may be an innocent victim when it pursues its former officers, the same innocent victim cannot pursue the co-conspirators that helped facilitate the exact same illegal efforts that rendered AIG the victim in the first place. At least for now, the plaintiffs can only seek recovery from within the AIG corporate family.