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Chancery Court Rejects Claims by AIG v. Co-Conspirators Based on In Pari Delicto Doctrine

By Francis G. X. Pileggi, Esq.

In Re American International Group, Inc., Consolidated Derivative Litigation;  American International Group, Inc. v. Greenberg, Del. Ch., No. 769-VCS (June 17, 2009), read opinion here.

A recent prior decision by the Chancery Court in this case was highlighted here.  That decision  was over 100-pages long. So by comparison, this 40-page decision might be considered relatively brief.

Issues Addressed

In this decision granting a Motion to Dismiss, the Chancery Court in this derivative suit brought on behalf of American International Group, Inc. addressed the following question:

May AIG sue its co-conspirators for the harm that AIG suffered as a result of the two alleged, illegal conspiracies involving AIG and those third-party conspirators?

Answer: No

The first conspiracy allegedly involved AIG engaging in an illegal bid-rigging conspiracy to carve up the market for certain insurance contracts and this conspiracy also allegedly involved the insurance broker Marsh & McLennan and the insurer ACE, Limited. A second alleged conspiracy involved General Re Corporation which allegedly involved writing fake insurance contracts for Gen Re so that AIG could inflate its loss reserves and make AIG thus appear healthier than it actually was and inflating AIG's stock price.

Procedural History

In the prior recent decision linked above, the Chancery Court found that the plaintiffs had stated well plead breach of fiduciary duty claims against certain AIG officers who were allegedly involved in the conspiracies at issue in this motion as well as other illegal activities. See In Re: Am. Int'l Group, Inc., 965 A.2d 763, 799 (Del. Ch., 2009) ('AIG I'). In that decision, the Chancery Court allowed AIG to sue its own directors, officers and employees for the damage they caused to AIG by having the corporation engage in illegal acts. The court summarized its prior ruling in this case thusly:

In an earlier opinion in this action, this court addressed the motions to dismiss brought by PricewaterhouseCoopers and several former-AIG officers and employers. 5

In that previous decision, this court held that the Complaint survived dismissal as against challenge by insider defendants Hank Greenberg, Edward Matthews, and Thomas Tizzio and that the Complaint stated well-pled claims of breach of fiduciary duty against those defendants. 6  The Complaint also adequately alleged fraud and conspiracy claims against Tizzio. 7

By contrast, this court held that New York law governed the claims against AIG's auditor, PricewaterhouseCoopers, and that New York law's approach to the doctrine of in pari delicto barred AIG from recovering against PricewaterhouseCoopers. That holding was driven by the court's choice of law analysis and did not reflect whether AIG could have maintained such a suit under Delaware law.

Finally, in that decision, this court held that it did not have personal jurisdiction over certain AIG officers and employees who had allegedly engaged in improper behavior before 10 Del. C. § 3114 was broadened to cover certain corporate officers.
Because none of the acts relevant to the illegal conduct pled in the Complaint occurred in Delaware and none of those defendants was a Delaware resident, this court could not exercise jurisdiction over them.

I now address the motions to dismiss brought by the third parties who allegedly conspired with AIG to commit illegal acts. The relevant allegations in the Complaint center on two separate courses of illegal conduct: the Fake Reinsurance Conspiracy and the Bid-Rigging Conspiracy. (some footnotes omitted).

5 See generally AIG I, 965 A.2d 763.
6 Id. at 799.
7 Id. at 807

In that prior ruling, Chancery Court did not need to address the doctrine of in pari delicto as a bar to suing third-party co-conspirators because 'the doctrine does not have force in a suit by a corporation against its own officers and employees. When a corporation sues insiders for their faithless behavior in causing the corporation to break the law, there is no logical reason why the corporation cannot recover. . . . To hold otherwise would be to let fiduciaries immunize themselves through their own wrongful, disloyal acts.'

Thus, the court explained that the instant motion presented a related, but separate, question: 'To what extent may a corporation like AIG recover from its co-conspirators for the damage the corporation suffered due to its own illegal conduct?'

Legal Analysis

In this decision, the Chancery Court determines that AIG may not seek an accounting for the damages it suffered as a result of its engagement in two illegal conspiracies from the third-party co-conspirators.

The court recognized that the issue in this case is governed by the doctrine of in pari delicto, the primary purpose of which is to prevent courts from the unproductive determination of apportioning fault between or among wrongdoers. The court engages in a scholarly and lengthy analysis of the public policy underpinnings of the in pari delicto doctrine, reaching back to Anglo-Saxon jurisprudence and venerable treatises on equity from the 19th century.

For anyone interested in all of the contours and public policy reasons behind the in pari delicto doctrine and its exceptions, this opinion is must reading.

The court provides thorough reasoning for the conclusion that AIG should not be permitted to sue its co-conspirators. However, the court also makes it clear that the plaintiffs have already benefited from one exception to the doctrine as follows: 'It is generally accepted that a derivative suit may be asserted by an innocent stockholder on behalf of a corporation against corporate fiduciaries who knowingly caused the corporation to commit illegal acts and, as a result, cause the corporation to suffer harm.' (citing In Re HealthSouth Corp. S'holders Litig., Inc., 845 A.2d 1096, 1107 (Del. Ch. 2003)) ('It is because corporations must act through living fiduciaries such as Scrushy that the application of the in pari delicto doctrine has been rejected in situations when corporate fiduciaries seek to avoid responsibility for their own conduct vis-a-vis their corporations.')

The court explained that the best approach is to apply the doctrine to prevent claims is as follows:

'[When] a corporation like AIG is alleged to have engaged in concerted illegal activity with third parties for that corporation's own benefit, that corporation may not recover against its third party co-conspirators. This does not leave stockholders without a remedy. Within each corporate family, stockholders may use derivative suits to seek relief from their corporation's own faithless fiduciaries for the harms suffered by their corporation. But the boundaries for recovery matter; they make stockholders and managers realize that the corporation will not be able to shift the costs of its own illegal conduct to third parties. This encourages the adoption and implementation of effective law compliance and monitoring programs, and it protects the judiciary from having to insure the ‘fair and equitable' distribution of the gains and losses of concerted illegal activity.'

Full post as published by Delaware Corporate and Commercial Litigation Blog on June 22, 2009 (boomark / email).