ContractsProf Represent!
On the AIG bonus contracts, from the SF Chronicle:
Someattorneys are asking why the government, which owns 80 percent of AIG,didn’t pressure the company to withhold payments while it investigatedways to stop them.
“There wasn’t any hurry to pay them out,” says Miriam A. Cherry, anassociate professor of contract law at the University of the Pacific.Cherry says it would have been better to force AIG employees to bring acase explaining why they were entitled to the bonuses.
Once in the hands of employees, those payments will be very hard toclaw back. AIG reportedly told Treasury Secretary Timothy Geithner thatif it didn’t pay out the bonuses that were due on Sunday, it could windup paying twice as much. Under a Connecticut law, employees can collectdouble damages plus attorneys fees if an employer withholds wages andthe employee can prove bad faith. Cherry says she is not sure whetherbonuses would qualify for wages under this law.
AIG paid additional bonuses to workers in other parts of itsinsurance empire, but they are not generating as much outrage asbonuses paid to employees of its Financial Products division, whichwrote contracts that essentially guaranteed securities backed by poolsof loans including subprime mortgages.
Losses on those securities grew so large that in September 2008, theFederal Reserve agreed to provide an $85 billion credit facility to AIGin exchange for nearly 80 percent of its stock. The government hasinjected a total of $173 billion into AIG, more than it has put intoany other financial firm.
Neither AIG nor the Obama administration has disclosed whichFinancial Products division employees got bonuses and why. New YorkAttorney General Andrew Cuomo has said he will subpoena AIG to find outwho got the money.
According to the Wall Street Journal, 400 employees were set toreceive bonuses ranging from $1,000 to $6.5 million. The bonus poolincluded retention bonuses that AIG agreed to pay employees in early2008 to prevent them from quitting.
It’s hard to imagine how anyone in the division that drove AIG tothe brink of bankruptcy could have earned a performance bonus for 2008.
“The dismal performance of the financial products unit was apparentin the earlier part of 2008,” says Lucian Bebchuk, Director of theprogram on Corporate Governance at Harvard Law School.
“Similarly, it is hard to justify the bonuses as essential forretention, as they were not made contingent on executives’ staying withthe company. The executives who recently received the bonus paymentsare now free to leave AIG with the bonuses in their pockets,” Bebchukadds.
“To make its claim more credible,” he says, the company should disclose the terms and dates of the contracts.
Without knowing the details, lawyers say it is hard to gauge AIG’s chances of getting the money back.
“If the bonuses have been earned, I don’t think there is any goodcontract remedy for getting them back,” said Frank Snyder, a lawprofessor with Texas Wesleyan University. “Some of my colleagues havesuggested using a doctrine called changed circumstances or frustrationof purpose” under the theory that things have changed so much thecontract can be undone. “But that doesn’t apply when one party has doneall the things they have to do.”
Snyder says that if AIG had been allowed to go bankrupt, thecontracts might have been undone in bankruptcy court. But “thegovernment didn’t let them go under, so the company is stuck with thecontracts it has.”
Theoretically, AIG’s nongovernment shareholders could try to sue theboard for violating its duty of care, but “I’m sure AIG (like mostcompanies) has a provision that says you can’t sue directors forviolating duty of care,” he adds.
Snyder says AIG’s best chance of getting back the money is throughpublic pressure: “The government is capable of starting a criminalinvestigation to get money from people they think shouldn’t have gottenpaid.”
Read the rest of the article here.
[Meredith R. Miller]