Former AIG unit staff accuse business of bankruptcy “abuse”

AIG unit insolvent to tune of US$37.4 billion, says insurer

Former AIG unit staff accuse business of bankruptcy “abuse”

Insurance News

By Jen Frost

AIG has been accused of “abuse of the bankruptcy process” by former employees, who have claimed the insurer is looking to avoid paying millions owed to them by shuttering a subsidiary that saw billions in losses during the 2008 financial crisis.

The insurer filed a motion for bankruptcy for subsidiary AIG Financial Products (AIG FP) on December 14 in Delaware, citing that the subsidiary was insolvent to the tune of US$37.4 billion, a figure that it said AIG FP owes to its parent company under a revolving loan arrangement.

AIG FP, which had engaged in credit protection through credit default swaps, became a “central figure” in the 2008 financial crisis, according to documents filed by AIG. With the insurer on the brink of collapse, the Federal Reserve loaned AIG US$85 billion to help plug its liquidity difficulties.

The business has faced legal action from senior ex-employees, who have alleged AIG FP borrowed US$194 million from them during the crisis that was never repaid. A case in London went AIG’s way on appeal in 2020, while a Connecticut case that AIG FP has said it continues to “vigorously defend” has been slated for next July.

A special committee was appointed in January 2022 as the business considered how to prudently address “its capital structure holistically” in the face of legal costs and liabilities, according to an AIG FP disclosure document, with their conclusions leading to the December 14 bankruptcy filing.

AIG ex-employees claim they are owed millions

In a December 15 preliminary statement, legal representatives of 46 employees alleged that the “real impetus” for the bankruptcy filing was to avoid making repayments to former senior staff members. The ex-employees’ claim could be worth between US$550 million and US$640 million, it has been alleged.

AIG FP had been asked to submit certain documents it had claimed were privileged to the Connecticut Court on December 14, the same day it made its Chapter 11 bankruptcy filing, according to the statement filed by the employee plaintiffs.

“Significantly, in the Connecticut Action, AIG FP was ordered to produce by December 14—i.e., the date of the Chapter 11 petition—documents that it tried to withhold as privileged, relating to its treatment of a purported loan with AIG and the circumstances of its failure to pay its employees,” the employee filing alleged.

“Instead of complying with that order, AIG FP commenced this case in a blatant attempt to shift what essentially is a two-party dispute to this forum, dressing it up as an actual reorganisation.”

During the 2008 financial crisis, AIG FP “borrowed hundreds of millions of dollars” from employees that was never repaid, it was alleged.

“By 2013, with the employee plaintiffs’ help, AIG had repaid the federal government with interest and returned to profitability,” the employee filing alleged.

“And though, by this time, AIG FP was well-positioned to repay its employees, it never did so.”

Ex-staff dispute loan status and reorganisation “purpose”

The employee plaintiffs further alleged that the Chapter 11 “can serve no reorganisational purpose at all” and that the loan said to be owed to AIG is instead “disguised equity”.

The loan has “senior” status to the employee claims, AIG FP claimed in its December 14 disclosure, with just US$1 million in total funds available to the former staff under its plans.

“Against this backdrop, the employee plaintiffs will soon move to dismiss the Chapter 11 case, as having been filed in bad faith and without a valid reorganisational purpose,” the employee filing said.

“Alternatively, in the event that this case remains before the court and is not dismissed for bad faith, the employee plaintiffs submit that an independent trustee—either following conversion to Chapter 7 or upon appointment of a Chapter 11 trustee—should be charged with investigating, among other things, the apparent substantial transfers and dissipation of AIG FP’s assets before this Chapter 11 filing and, if appropriate, pursue claims against AIG and other insiders for their role in this scheme.”

The AIG unit has been in a wind down process for more than 14 years and had assets worth US$315 million at the petition date, according to its December 14 disclosure statement. This included US$216 million of intra and inter-company receivables and subsidiary investments, as well as a credit linked note and US$10 million cash in hand.

AIG was contacted for comment.

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