In Starr International Co. v. Federal Reserve Bank of New York, No. 12-5022-cv, 2014 U.S. App. LEXIS 1770 (2d. Cir. Jan. 29, 2014), the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims against the Federal Reserve Bank of New York (“FRBNY”) for alleged breaches of its fiduciary duties, holding that federal common law preempted state fiduciary duty law. This decision provides an example of circumstances in which federal common law preempts state law. Where, as here, a uniquely federal interest in the stability of the economy conflicts with state law, federal common law will prevail.
During the throes of the 2008 financial crisis, American International Group, Inc. (“AIG”) warned the federal government that it faced possible bankruptcy. In response, FRBNY offered AIG a rescue arrangement. AIG accepted the deal. Starr International Co. (“Starr”), an AIG stockholder, subsequently filed a complaint alleging direct and derivative breach of fiduciary duty claims against FRBNY. Starr alleged FRBNY had breached its fiduciary duties because (1) FRBNY caused a special vehicle funded by FRBNY and AIG to purchase $62 billion in assets from AIG default swap counterparties at full par value, effectively giving them “backdoor bailouts” to the detriment of AIG and (2) FRBNY brought about a reverse stock split of AIG’s common shares to circumvent a vote by AIG’s common shareholders rejecting a proposal to increase the number of shares of AIG common stock. Starr also claimed that FRBNY had aided and abetted AIG’s officers in breaching their fiduciary duties, and was liable for its actions under Delaware corporate fiduciary duty law. FRBNY moved to dismiss.
The United States District Court for the Southern District of New York dismissed plaintiff’s fiduciary duty claims for failure to state plausible claims, holding that (1) Starr failed to plead that FRBNY owed fiduciary duties to AIG under Delaware law and (2) Delaware fiduciary duty law was preempted by federal common law because FRBNY is a federal instrumentality charged with preserving the stability of the national economy. Starr appealed.
The Second Circuit affirmed, agreeing with the district court’s holding that federal common law preempted Delaware’s fiduciary duty laws in this case. The Court first discussed the nature of federal reserve banks, noting that FRBNY, as a regional federal reserve bank, is “an instrumentalit[y] of the federal government.” Federal reserve banks are “fiscal agent[s]” of the United States that operate “in furtherance of the national fiscal policy,” and not for shareholder profit. Federal reserve banks perform some “general fiscal duties of the United States” and have the power to provide discretionary emergency loans to nonmembers in “unusual and exigent circumstances” where that nonmember’s failure to obtain credit “would adversely affect the economy.” See 12 U.S.C. § 343; 12 C.F.R. § 201.4(d).
The Second Circuit went on to observe that federal common law preempts state law in areas of “uniquely federal interests” when a “significant conflict” exists between a federal policy or interest and the operation of state law. The court determined that such a conflict existed when FRBNY rescued AIG during the 2008 financial crisis. If FRBNY were a fiduciary under Delaware law, it would have a duty to protect its shareholders and act in their best interest. The court deemed that fiduciary duty in direct conflict with FRBNY’s duty as a federal reserve bank to act in the public interest and take necessary action in situations where a failure to act “would adversely affect the national economy.” The court declined to consider whether FRBNY had exceeded its statutory authority in rescuing AIG, noting that Starr had not identified any case that limited the scope of preemption and permitted state law to police a federal actor’s “excesses of authority.”
The Second Circuit’s decision in Starr provides additional guidance as to the sort of “uniquely federal interest” and “significant conflict” with state law, which will lead to federal common law preempting state law. Companies seeking to determine whether preemption applies in a particular instance may look to Starr for an example.