Plaintiffs in AIG subsidiary case seek bankruptcy dismissal

AIG Financial Products filed for bankruptcy last month. — A group of former AIG executives say the insurer owes them lost compensation.

By John Hilton

Plaintiffs suing a subsidiary of insurer American International Group Inc. over alleged withheld income filed a motion Monday asking a Delaware court to dismiss the insurer's bankruptcy filing.

AIG Financial Products Corp. filed for Chapter 11 bankruptcy in December in the U.S. Bankruptcy Court for the District of Delaware and plans to reorganize. AIG Financial Products has no material operations or businesses and no employees.

However, a group of former AIG executives say the bankruptcy filing is a sham attempt to avoid culpability for disputed compensation that dates to the government bailout of AIG in 2008-09.

"This is an abuse of the bankruptcy process," reads the motion filed Monday. "This case has nothing to do with reorganizing the putative Debtor—AIGFP—and has everything to do with using the Chapter 11 process to benefit its non-debtor parent American International Group, Inc., in furtherance of its more than decade-long attempt to prevent the Employee Plaintiffs (former AIGFP employees) from being repaid the hundreds of millions AIGFP borrowed from their compensation plans and failed to repay."

Disputed funds

According to court documents, 46 former employees claim that AIGFP borrowed approximately $194 million during the 2008 financial crisis but has never repaid.

During the 2008 financial crisis, AIGFP "borrowed" the money from two deferred compensation plans for AIG employees, the plaintiffs said. AIG would go on to restore its financial condition thanks to a much-debated government "bailout" facilitated by the Obama administration.

The insurer and the 46 executives have been tied up in court since 2019 over the missing money. Plaintiffs are asking the court for more than $500 million in total damages.

"The Plans provided that AIGFP could borrow from its employees’ deferred compensation accounts, but AIGFP had the unequivocal obligation to restore those account balances after borrowing from them," the plaintiffs say in their original brief.

In its bid to shut down the bankruptcy filing, plaintiffs focus on AIG Financial Products having no operations. The lack of any activity by the subsidiary makes claims of debtor obligations dubious, plaintiffs say.

"What AIGFP’s Chapter 11 seeks here would turn the purpose of Chapter 11 on its head: to benefit the non-debtor parent (AIG Inc.) of an entity with substantially no operations (AIGFP), at the expense of its creditors (the Employee Plaintiffs)," the filing reads.

AIGFP’s filing is predicated on the "false narrative" that the approximately $37.7 billion owed to its parent arises from an arm’s length debtor-creditor arrangement, plaintiffs say.

"That could not be further from the truth," plaintiffs claim. "Instead, that so-called 'debt' papered by a four-page 'loan' agreement containing no interest payment amounts or maturity date—is, in substance, equity. At the time the purported debt was issued, AIGFP was already in wind down mode, and this 'debt' never was expected to be repaid."

A $1 million pool

Earlier this year, a judge set Dec. 14 as a deadline for AIGFP to produce a raft of documents related to the money and the insurer's obligations to employee accounts.

"Rather than comply with this court order, AIG and AIGFP are now weaponizing the Bankruptcy Code in bad faith," plaintiffs said in their brief.

In its bankruptcy filing in Delaware, AIGFP said its reorganization plan would create a $1 million pool for the 46 plaintiffs to share.

"In the event that the Debtor does not receive the requisite votes to confirm the Plan or otherwise fails to meet the requirements for confirmation under section 1129 of the Bankruptcy Code, the Debtor intends to pursue and consummate a [sale] to the highest and best bidder pursuant to Court-approved bidding and auction procedures," the AIGFP filing states.

The reorganization will complete AIG's winding down of AIG Financial Products, which it's been working on since the 2008 financial crisis.

AIG was slammed by the deterioration in the credit markets in 2008 amid concerns that complex, structured investments it insured would increasingly default. Its problems did not come from its traditional insurance subsidiaries, but instead from its financial services operations, and primarily its insurance of mortgage-backed securities and other risky debt against default.

AIG said in a regulatory filing that the reorganization won't have a material impact on its consolidated balance sheets or those of Corebridge Financial Inc. (formerly AIG Life & Retirement).

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.