Does Federal Government Rescue Create Fiduciary Duties?

Delaware courts have emphasized that for an entity to be liable for breach of fiduciary duty owed to a corporation, it must have control over that corporation, as the “very essence of a breach of corporate law fiduciary duty claim is the misuse of corporate control.” Sample v. Morgan, 935 A.2d 1046, 1059 (Del. Ch. 2007). Under Delaware law, an entity controls a corporation where it is a majority shareholder or where it is a minority shareholder that exercises actual control over corporate conduct. Citron v. Fairfield Camera & Instrument, 569 A.2d 53, 70 (Del. 1989).

In Starr International v. Federal Reserve Bank of New York, 2012 WL 5834582 (S.D.N.Y.), Judge Paul Engelmayer considered these principles in the context of direct and derivative breach of fiduciary duty claims arising from the federal government’s rescue of American International Group, Inc. (AIG) through the Federal Reserve Bank of New York (FRBNY), which he found to be a “federal instrumentality.” Engelmayer analyzed whether FRBNY controlled AIG during three transactions which plaintiff Starr International Co., an AIG stockholder, challenged as breaches of fiduciary duty. Engelmayer also analyzed whether the imposition of Delaware common law upon the FRBNY was precluded if doing so would conflict with its federal responsibilities.

The Structure of the Rescue