Claims And Issues

New York Insurance Broker: Contract, Negligence, Maybe; Fiduciary Breach, Not.

   Under New York law, "[a]n insurance agent or broker can be held liable in negligence if he or she fails to exercise due care in an insurance brokerage transaction.  Thus, a plaintiff may seek to hold a defendant broker liable under a theory of either negligence or breach of contract ...."  Download Bruckmann, Rosser, Sherrill & Co. v. Marsh USA, Inc. (N.Y. App. Div. 1st Dep't Opinion Filed September 1, 2009).   Accordingly,  a Trial Court's Order of Dismissal was modified by the Appellate Division to reinstate a negligence cause of action with a contract cause of action.

   However, in that same case, causes of action related to allegations implicating an alleged Breach of Fiduciary Duty "were properly dismissed."  Download Bruckmann, Rosser, Sherrill & Co. v. Marsh USA, Inc. (N.Y. App. Div. 1st Dep't Opinion Filed September 1, 2009).  As a matter of New York law, said the Appellate Division, an Insurance Agent has "'no continuing duty to advise, guide or direct a client to obtain additional coverage' ....Thus, absent a special relationship, a claim for breach of fiduciary duty does not lie ...."  Id.

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"Unclean Hands" Bar to Advancement and Payment.

    A former officer of a corporation sued the corporation for its allegedly wrongful refusal to advance the officer's defense expenses under the bylaws of the corporation in  Download Tafeen v. Homestore, Inc. (Del. Ch. April 27, 2004)..  (Director's and Officer's Insurance Policies also usually provide for advancing the officers' defense expenses, although under the typically worded "fraud" Exclusion in such Policies the Insurance Company raising that Exclusion may have to await the outcome of the underlying litigation.)  The corporation defended these allegations with the defense of unclean hands among other defenses.

    The officer's complaint contained allegations that the underlying litigation in which the officer incurred defense expenses including attorney's fees included 6 listed lawsuits in California in which he and the corporation were sued by insurance companies.  Testimony in the Court File "revealed that [the corporation] had overstated its revenues" during the period that the officer was employed there, and that while other officers were "being prosecuted in connection with similar overstatements," the officer (who was then no longer only an employee but had apparently assumed a corporate office) "purchased a home in Florida" with a purchase price of $1.45 Million.  Id.  The Court of Chancery Judge in this case held that the facts in the record presented a triable issue of fact on the officer's "intent in buying the house" which was central to the corporation's defense of unclean hands.  Id.

    Unclean hands has even more recently been held a good defense to a Count for alleged breaches of a Settlement Stipulation and Order entered as part of a divorce decree.  The defendants included an ex-husband and a corporation.  The Settlement Stipulation and Order included personal guarantees from the ex-husband who thereby also agreed to obtain corporate guarantees (apparently later given to the plaintiff) and also a consulting agreement between the corporation and the plaintiff in  Download Medek v. Medek (Del. Ch. Sept. 10, 2008)..

    The defendants alleged "an undisclosed agreement" between the plaintiff and her ex-husband defendant, whereby the plaintiff allegedly was paid $150,000.00 "to focus her efforts to recover her claimed damages on" the other defendants.  Id. In this case, the Vice Chancellor of the Court of Chancery of Delaware ruled that the resulting defense of unclean hands was "closely interrelated" to these allegations and presented a triable issue of fact there, too.  See id.

    In addition to equitable remedies previously outlined here against persons allegedly receiving Federal Taxpayer Funds in inequitable ways, equity provides defenses to not paying such persons in the first place.  Equity has always provided those defenses.  One of them is the equitable defense of unclean hands.  Clearly, that equitable defense is alive and well.

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AIG's Bonus Money: Don't Show Them MONEY, Show Us CONTRACTS ....

HAPPY ST. PATRICK'S DAY!

 

PART TWO OF TWO.

Timing is Everything.  The Bailout Bonuses Due March 15 Were Already Paid on Friday, March 13 Before the Federal Taxpayers Even Knew.

 

"We would never make any important business decisions without discussing them with our government managers and owners."  Unknown AIG "executive" quoted anonymously by Edmund L. Andrews and Jackie Calmes, "The White House Seeks to Block Bonuses at A.I.G." p. A1, col. 6 (New York Times Nat'l Ed., Tuesday, March 17, 2009). 

 

          The Bailout Bonuses have reportedly already been paid, for the most part.  The payments were also reportedly made with the approval of Mr. Timmy Geithner, Treasury Department, and of the Federal Reserve.  See Brady Dennis and David Cho, "Rage at AIG Swells as Bonuses Go Out"  (Washington Post Online, Tuesday, March 17, 2009); Andrews and Calmes, supra.

 

Timing is Everything.  Did AIG know these Bailout Bonuses were coming and that AIG was in trouble, even when AIG agreed to pay these people?

 

          The timing of the Bailout Bonuses is confusing, at first.  Then it comes clear.  They were promised before the Bailout of AIG began in September, 2008. David Cho and Brady Dennis, "Bailout King AIG Still to Pay Millions in Bonuses/Geithner Gets Firm to Make Revisions" (Washington Post Online, Sunday, March 15, 2009).   

          These bonuses were promised apparently for the first time in February, 2008.  That is when the head of the AIG Financial Products Division resigned because of the problems AIG was facing from that division and its Credit Default Swap deals.  See E. Scott Reckard and Jim Puzzanghera, "Ailing AIG Stands by Need for Bonuses" (Los Angeles Times Online, Sunday, March 15, 2009).  The gentleman did not leave because things were going well in February, 2008.  There can be little doubt that as the New York Times has reported, at that time "problems stemming from the mortgage crisis were becoming clear and there were concerns that some of the best-informed derivatives specialists might leave."  Edmund L. Andrews and Peter Baker, "At A.I.G., Huge Bonuses After $170 Billion Bailout" p. A1, col. 5 (New York Times Nat'l Ed., Sunday, March 15, 2009), rewritten in part online, under the headline, "AIG Planning Huge Bonuses After $170 Billion Bailout".  Draw your own conclusions about what AIG knew, and when AIG knew it.

 

What did the Federal Government Know, and When did the Federal Government Know It?

 

          AIG reportedly gave notice of the Bonuses to people in the AIG Financial Products Division in February, 2008.  It also gave the Federal Government notice of those Bonuses when AIG originally applied for Bailout Funds from the Federal Taxpayers, and again when AIG requested more money on March 2, 2009.  See Dennis and Cho, 03.17.09; Andrews and Calmes, supra.

 

          Further, officials at AIG are uncontradicted in asserting that they would not have paid these Bonuses without the advance approval of the Federal Government.  "A.I.G. executives said they would never have proceeded with the bonus payments before getting approval from the Treasury and the Federal Reserve."  Andrews and Calmes, supra.

 

          Whoever approved these Bonuses has some explaining to do.

 

Overwhelming, Incapacitating Fear of Being Sued.

 

          Lawyers representing "the Treasury Department" and "AIG" advised that AIG could be sued if the Bailout Bonuses were not paid.  David Cho and Brady Dennis, supra.  The lawyers reportedly also told Mr. Geithner that punitives damages might be recovered if AIG was sued, and that Mr. Geithner "agreed that the employees might win punitive damages if their contracts were broken."  E. Scott Reckard and Jim Puzzanghera, supra.  See also Dennis and Cho, 03.17.09.  It has not been reported whether any of these lawyers in question have ever tried a case.

          The Bailout Bonus Contracts must be unusual.  Punitive damages are rarely available in an action to enforce any contract.  In any jurisdiction in this country.  In any contract case.  Ever.

 

          It has also been reported that unnamed, unknown Federal "officials" were reportedly of the view that "the government could not revoke" these Bonuses.  David Cho and Brady Dennis, supra.  Perhaps these anonymous Federal "officials" are the same people that approved the payout of these Bailout Bonuses in the first place.

          Nonetheless, Members of Congress apparently not involved in these decisions, have talked about legislative options to recover these Federal Taxpayer Funds such as through taxing the Bailout Bonuses apparently up to 100% of their total amounts.  See Frank James and Jim Puzzanghera, "Sen. Charles Schumer Threatens to Recover AIG Bonuses by Taxation" (Los Angeles Times Online, Tuesday, March 17, 2009). 

 

Employees of AIG, including the AIG Financial Product Division, Are Leaving.

 

          Another so-called fear is reported as a justification for the Bailout Bonuses and it, too, rings untrue.  Reportedly, AIG had to destroy the village in order to save it, er, agree to pay these Bonuses in order to keep the employees.  Well, for one thing, AIG now admits that many of these people were scheduled for termination.  Hugh Son, "AIG Plans Retention Pay for Staff Facing Dismissal (Update 2)" (Bloomerg.com, Tuesday, March 17, 2009, link unavailable at the time of this post).  If that ever was a reason, it clearly was not a good reason.  Further, many of the employees in question are leaving AIG as fast as their little legs will carry them -- or perhaps one second after they are paid the Bailout Bonuses.

 

          The "head of communications for AIG" has been quoted as saying that the Bonus Babies, i.e., the employees of the AIG Financial Product Division, are "'de-risking actively.'"  E. Scott Reckard and Jim Puzzanghera, supra.  I guess the English translation is that the Bonus Babies are looking for other work.  Other newspaper reports indicate that they are.

 

          Let them go.  Because of them, AIG is too failed to be big.  Let them go. 

 

 

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AIG's Bailout Bonuses: Don't Show THEM Money, Show US CONTRACTS.

PART ONE OF TWO PARTS.

"We need to find out whether these bonuses are legally recoverable."  Representative Barney Frank, Chair of the U.S. House of Representatives' Financial Services Committee, quoted by Mary Williams Walsh, "A.I.G. Lists Firms to Which it Paid Taxpayer Money" p. A1, col. 6 (New York Times Nat'l Ed., Monday, March 16, 2009).

    Upon reflection, the unfolding story of AIG's Bailout Bonuses that was publicly reported for the first time over this past weekend, presents two major and hidden questions in my judgment.  These questions are in addition to the obvious ones.

    First, over the weekend we received an announcement that someone had reviewed the unseen AIG Bonus Contracts and came to a legal conclusion that they "should" be paid.  Why did we receive that announcement from Mr. Larry Summers, an economics adviser to the President, and from Mr. Timmy Geithner, the current Treasury Secretary?  These bonuses apparently guaranteed by AIG would instead be paid with Federal Taxpayers' Money, not AIG's money.  Why were we not told instead that the Attorney General of the United States and the Department of Justice which he heads, came to a legal conclusion -- if he and they actually did come to that legal conclusion -- that our money, yours and mine, "should" be paid out on these bonuses?

    Second, it was reported that Mr. Geithner telephoned AIG on Wednesday, March 11, before the next installment of AIG's Bailout Bonuses came due to be paid as of Sunday, March 15, 2009.  Mr. Geithner, along with Mr. Summers and others, advanced another generous amount of Bailout money to AIG on Monday, March 2nd.  Did Mr. Geithner and the others not know then, that within two weeks AIG would take our money and give it away in these Bailout Bonuses?  Why did no-one apparently do any due diligence?  Was it because it was not their money, but ours?  Otherwise why did Mr. Geithner wait until the 11th of March to contact AIG about the payment of Bailout Bonuses which he pretty clearly had only just learned about?

    Who are these people?

    After receiving $170 Billion in Bailout Money from the Federal Taxpayers since the Fall of 2008 (no pun intended), AIG reportedly will pay a mixture of "bonuses and retention pay" amounting to $165 Million with the approval of the current Federal Government.  At first, the amount of these Bailout Bonuses was unreported and apparently unknown as this story developed.  See David Cho and Brady Dennis, "Bailout King AIG Still to Pay Millions in Bonuses/Geithner Gets Firm to Make Revisions" (Washington Post Online, Sunday, March 15, 2009).  Another newspaper reported that the figure is $165 Million.  E. Scott Reckard and Jim Puzzanghera, "Ailing AIG Stands by Need for Bonuses" (Los Angeles Times Online, Sunday, March 15, 2009).  Still another newspaper reported that AIG had already paid $55 Million in Bonuses in December, 2008, and the remaining amount of "about $165 million" in Bonuses was coming due "on or before March 15."  Edmund L. Andrews and Peter Baker, "At A.I.G., Huge Bonuses After $170 Billion Bailout" p. A1, col. 5 (New York Times Nat'l Ed., Sunday, March 15, 2009), rewritten in part online, under the headline, "AIG Planning Huge Bonuses After $170 Billion Bailout".

    Each of these newspapers reported this same thing, however:  The Bailout Bonuses that came due on March 15th were payable to AIG Financial Products, the very division of AIG which brought it down and which called forth uncountable amounts of Bailout Money from the Federal Taxpayers.  It will be remembered, of course, that the core business of AIG was always Insurance.  The division of AIG Financial Products instead invented and sold Credit Default Swaps or CDS's for which AIG was liable and which were sold in huge quantities on the strength of AIG's then-credit rating.  CDS's are the financial equivalent of "Insurance", but unregulated, without Reserves and without capital to back up the guarantees.  According to the report in the New York Times, these Bonuses will be paid to 400  persons  in that division, with 7 'executives' alone slated to receive more than $3 Million.  Edmund L. Andrews and Peter Baker, supra. 

When did AIG agree to these Bonuses, and Why?

This post will be continued ..... WITH THESE TWO SUGGESTIONS ALSO PUBLISHED HERE:  (1) Show us the CONTRACTS and (2) Absent compelling privacy considerations, TELL US WHO THESE BONUS BABIES ARE AND IF THEY ARE STILL WITH AIG NOW.

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Loan Modifications to Forestall Foreclosures: Federal Immunity for Loan Servicers.

    Mortgage or Loan Servicers may be sued by Lenders if they agree to modify a loan or mortgage to forestall foreclosure on Borrowers' homes.  In other words, Mortgage Servicers can be sued for doing a good thing.  Lenders may sue such Mortgage Servicers for Breach of Contract or Breach of Fiduciary Duties -- owed only to the Lenders.  In the current age, fear of being sued is for many an unrelenting terror.  Such is the headshaking news posted, for example, on December 3, 2008 on www.insuranceclaimsbadfaith.typepad.com.

    The financial fiasco is not easy to understand, for a lot of reasons.  For one thing, if a person is a liberal arts major from a working family, like the author is, then learning the language of finance may be something like learning a second language.  Help is on the way, as they say.  One of the usually undefined words recently in vogue is "servicers".  Here is a friendly and useful working definition, friendly and useful to liberal arts majors and working families alike:

    Servicers act as a bridge between lenders and borrowers, taking in mortgage interest payments from borrowers, often paying property taxes and distributing income to the investors who own the real estate.

Gretchen Morgeson, "Fair Game/Before We Award a Taxpayer Seal of Approval..." p. 1, col. 2 (New York Times Nat'l Ed., SundayBusiness Section, Sunday, January 11, 2009), published online under the headline, "Beyond the Boldface Names in the IndyMac Deal".  

    The U.S. Congress may step in to provide some protection to Loan and Mortgage Servicers that do the right thing.  Immunity protections are among the amendments which are going to be offered to the Troubled Assets Relief Program ("TARP") of the Emergency Economic Stabilization Act of 2008.  The amendments will be offered by the Chair of the U.S. House Financial Services Committee, Rep. Barney Frank (D-Mass.).  See January 9, 2009 Press Release Outline of Legislation to Amend TARP.

    Most of the press regarding these proposed amendments has concentrated on other features such as restricting executive compensation and banning the use of corporate jets.  See, e.g., Andrew Ward, "Frank Moves to Tighten TARP Aid" (Financial Times.com, Friday, January 9, 2009); Tom Petruno, "Money & Co." Web Log, "Frank Wants More Bank Pay Restrictions, And No Private Jets" (Posted at Los Angeles Times Online, Friday, January 9, 2009).

    The news addressed in this post, however, is that which may have a major effect on Immunity for certain Servicers.  The potential consequences of adopting these amendments are great.  And they are potentially very beneficial.

    The above January 9, 2009 Press Release Outline of the proposed amendments in this area reveals that if enacted, Federal Law will extend Immunity from "liability" for Servicers who extend "loan modifications":

The Federally conferred Immunity will apply "regardless of any provision in a servicing agreement," i.e., regardless of any contract provision in the agreement between the Lender and the Servicer; and

Unsuccessful Plaintiffs who dare to sue protected Servicers will have to pay the successful Servicers' Attorney's Fees in addition to Court Costs.

Immunity Laws like these may go a very long way toward easing the Credit Crisis, reducing the number of Foreclosures displacing Homeowners from their homes, and providing a new application of Federal Immunity Laws to people other than wiretappers and 21st Century "Black and Tans" and other thugs.  While there may be other effects which cannot yet be known, in general terms enactment of Federal Laws like these would in short lead to more than a few welcome developments.

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