Second Circuit Holds that Federal Reserve Bank of NY Was Not Subject to State Law Fiduciary Duty Claim for Actions During Financial Crisis

Late last month, in Starr Int’l Co. v. Fed Reserve Bank of N.Y., the Second Circuit held that the Federal Reserve Bank of New York (“FRBNY”) could not be held liable for state law fiduciary duty claims when it was acting under its statutory mandate to rescue a corporate entity. In doing so, the court made clear that such protections would extend to the Federal Reserve Bank where it is alleged that, in some of the actions it took, FRBNY had exceeded its statutory authority.

The Starr Int’l case arose out of the bailout of American International Group (“AIG”) in 2008. Starr, which had been a principal shareholder of AIG, alleged that actions taken by FRBNY were designed to benefit FRBNY and the United States Treasury to the detriment of AIG’s shareholders in a manner that would constitute a breach of fiduciary duties owed to shareholders of a Delaware corporation. As part of the AIG rescue, FRBNY made available $85 billion to AIG under a new credit agreement (the “Credit Agreement”) on the condition that AIG give the federal government an 80% interest in AIG common stock to be held in a trust (the “Trust”). Prior to entering into the Credit Agreement, AIG replaced its existing CEO with Edward Libby, whom Starr alleged to have been under the control of FRBNY.

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