A Delaware bankruptcy judge ruled that American International Group deceived its former executives to avoid paying hundreds of millions of dollars in deferred compensation, potentially upending the insurance giant's wind-down of the financial-products unit nearly two decades after the 2008 financial crisis.
In a 151-page opinion issued Friday, Judge Mary Walrath of the U.S. Bankruptcy Court in Wilmington, stripped AIG of its status as the top creditor in the chapter 11 case of its bankrupt subsidiary, AIG Financial Products.
The judge ruled that AIG's outstanding $37.6 billion intercompany loan to the unit was actually an equity contribution rather than a bona fide loan. That characterization, the judge said, had rendered the subsidiary technically insolvent and voided its obligation to pay the executives.
AIG declined to comment Monday.
The decision clears the way for 46 former executives of the unit to pursue their claims for $563 million, which had been wiped from their deferred compensation accounts in 2008. However, they must still fight in court to prove they are contractually entitled to the money.
In her opinion, the judge highlighted internal emails showing AIG aborted a 2010 recapitalization plan because it would have returned AIGFP to solvency and legally obligated it to restore the executives' claims to the deferred compensation accounts.
"I don't care how it's driven, we're not paying the deferred comp," then-AIG Chief Financial Officer David Herzog wrote in a 2010 email, court papers show. Herzog couldn't immediately be reached for comment.
The email contradicted what the former executives had heard from then-CEO of AIGFP, William Dooley, who told them AIG's intent was to restore the accounts.
The judge concluded that AIG misled the former executives to keep them on the job. The court found a "pattern of deception by AIG about FP's intent to prepare a restoration plan," she said in her opinion.
In 2022, AIG placed AIGFP in chapter 11 to finalize the wind-down of the unit whose wrong-way mortgage bets triggered a massive U.S. bailout that nearly took down the global economy in 2008. To stave off collapse, AIG took one of the biggest bailout packages in U.S. history, reaching more than $182 billion at its peak. The package was fully repaid by 2013.
According to bankruptcy court filings, AIG extended $37.6 billion of the bailout funds to the unit in the form of intercompany loans to satisfy AIGFP's obligations to counterparties. For nearly two decades, the funding was documented and treated as debt by AIG, the Federal Reserve and Congress.
The judge, however, re-characterized those loans as equity under precedent of the Third Circuit, where Delaware is located. That precedent requires courts to look past formal labels to evaluate the economic reality of a transaction and determine what the parties actually intended.