Fed Again Asks Court to Dismiss Greenberg Suit

The Fed's answer in the New York suit goes to the key issue the Washington court said should be determined by further proceedings: that federal officials "coerced" the Fed board into accepting the Fed demand that it turn over 79.9% of its stock in exchange for an initial $85 billion in cash in September 2008.

"Starr's allegations that the AIG board lacks independent capacity to evaluate a demand fall far short of satisfying the rigorous pleading standard Delaware courts have appropriately imposed before permitting individual shareholders to sue for a company," Kiernan said in the Fed filing.

"The AIG board's conduct in response to this motion by itself amply disproves Starr's unsupportable contention that FRBNY has absolute control over that board," the Fed answer said.

In its answer to the Fed's initial brief, the latest Fed filing said Starr and Greenberg had "abandon[ed] its unsustainable claims that FRBNY deprived AIG and Starr of constitutional rights and breached Delaware law fiduciary duties in its September 2008 rescue lending to AIG."

In the New York case, the Fed brief says that all of Starr's claims are based on Delaware law.

"If Delaware law does not apply to the challenged actions, the claims should be dismissed as legally unsustainable," the Fed brief says.

The brief adds that, "Starr concedes that state fiduciary duty law cannot be applied to curtail FRBNY's exercise of functions prescribed by federal law. Starr tries to escape the consequence of this proposition by contending that FRBNY's federal function consists only of lending money to individual borrowers and setting interest and collateral requirements.

 As Starr would have it, federal law would displace Delaware law from certain aspects of FRBNY's rescue of AIG, but not other aspects like ML III and the transactions in AIG equity," the brief said.

The brief added that the Fed "acted to foster the financial stability of the United States in all of its conduct with respect to the AIG rescue." And, "In doing so, it was carrying out a quintessential federal function pursuant to an enabling federal statute, Section 13(3) and the Federal Reserve Act's "incidental powers" provisions."

The brief added that "These kinds of activities are not subject to Delaware law rules that Starr contends would have required FRBNY to act differently.