AIG Defends Bonus Payments
posted by Lawrence Cunningham
As a companion to my post , AIG Contracts Questions, consider the following summary analysis of a fascinating memo, undated, unsigned and “produced quickly,” AIG explains the legal and business grounds for why it had to pay $165 million in bonuses to 400 employees of its complex financial contracts business. These payments, which range from $1,000 to $6 million, cover services during 2008, pursuant to employment agreements, and an employee retention plan, all entered into in early 2008.
After defending the payments on legal and business grounds, the memo promises, somewhat incongruously, how AIG will use its best efforts to reduce bonus amounts that may become due for services during 2009. Following is a summary and elementary assessment of these three parts of the memo: legal, business, future efforts.
Legal Grounds
1. Breach of Contract. AIG says outside counsel opines that a breach of these contracts exposes AIG to damages for breach of contract. The memo does not discuss whether non-payment of the bonuses would constitute a breach of contract. It does not discuss any of the grounds noted here that are available as defense to a breach of contract claim.
Nor does it discuss the terms of the contracts, other than to say, by way of description, that the payments are not due to any employee terminated for cause. It does not discuss what constitutes cause or whether any of the covered employees could be terminated on that basis. To the contrary, the memo emphasizes that the covered employees are very valuable—indeed, essential—to AIG’s rehabilitation (discussed below under Business Grounds).
2. Violation of State Wages Statute. AIG says outside counsel opines that breach of these contracts exposes AIG to penalties under applicable state wage protection laws. (The memo says Connecticut law governs the plan and implies it governs the contracts.) The memo says that Connecticut’s wage law exposes employers to double damages if they fail to pay wages “improperly” or absent “good faith.”
The memo asserts that the subject bonuses are within the statute’s definition of “wages,” although it cites a case suggesting that this is a factual question hinging upon whether the bonuses are paid for particular employee services or based on overall corporate performance. The memo does not discuss whether a decision not to pay the bonuses would be improper or lack good faith, as the cited statute and case law require.
3. Constructive Discharge. The memo says that nonpayment of the bonuses “could likely” constitute “constructive discharge” of employees. It says that this would entitle employees to resign immediately and recover payments not only in respect of 2008 but also 2009. It says that laws in other countries, including France, Japan, the United Kingdom and Hong Kong, provide similarly. The memo does not provide any evaluation of this concept of constructive discharge.
Business Grounds
1. Cross Default Risk. Business contracts with third parties contain provisions entitling the other party to terminate early if AIG defaults on payments exceeding $25 million. By implication, the memo suggests that non-payment of these bonuses would constitute such a default, triggering these counterparty rights. Again, the memo does not discuss whether non-payment would actually constitute a default. It strongly emphasizes that any such early terminations would be calamitous.
2. Complexity and Unique Knowledge. The memo emphasizes that the relevant business is “complicated” and that these employees may uniquely “know how to” manage it. The business is so “complex” and its “transactions . . . are [so] difficult to understand and manage” that “replacing key traders and risk managers would not be practical on a large scale.” Moreover, the covered employees with “knowledge of the trades and the unique systems at [the company] will be critical to an effective unwind of [these] businesses and portfolios.”
3. Regulatory Takeover Defaults. The memo adds that if certain senior employees left, French banking authorities would have the right to appoint senior managers at the division. That, in turn, would be a default under various other business contracts, posing additional costs running to “tens of billions of dollars.”
Progress and Plans
1. Shrinkage. The memo details the progress these employees have made in reducing the company’s risk since October 2008. It explains how AIG has reduced the size of this complex business, including by shrinking its work force from 450 to 370 employees.
2. Reducing Future Pay. Somewhat incongruously, the memo concludes by promising to use best efforts to reduce compensation during 2009. It says that the “25 highest paid active contract employees have agreed to reduce their remaining 2009 salaries to $1.” It does not say that they have agreed to reduce their claims to bonuses, except to say that AIG will use best efforts to get them reduced.
March 17, 2009 at 11:51 am
Posted in: Contract Law & Beyond
Print This Post
Responses (6)
A.W. - March 17, 2009 at 1:40 pm
Btw, click on my name for a contrarian view on the contract issue, which frankly is basically similar to my own.
The mob mentality is getting frankly out of hand. they now have to put guards on their offices. Oh, and everyone is complaining that they are putting money in foreign companies. Imagine that. American International Group is spending its money internationally. And now at least one senator suggested they should committ ritual suicide, i.e. literally fall on some swords. nice.
A.W. - March 17, 2009 at 2:13 pm
Btw, scrappleface has set its phasers to “snark” about Obama’s outrage over bonuses. i have to say that scott ott is a genius at impaling people on their own hypocrisy. The rest of this post is a cut and paste from his article:
————-
Obama, Dodd Outraged at AIG Campaign Cash
2009-03-17) — As the furor over AIG executive bonuses threatened to bring the current economic recovery to a halt, President Barack Obama and Sen. Chris Dodd today threw fuel on the fire, announcing their “fierce outrage” upon hearing that the insurance giant had given each of their campaigns more than $100,000 last year.
“While AIG was collapsing, and her executives crawling to DC with hat in hand,” said Sen. Dodd, D-CT, “my campaign, and then-Senator Obama’s were getting what can only be termed influence bonuses from the same firm. Naturally, I knew nothing about this, and I’m now seething with anger at the injustice.”
President Obama and Sen. Dodd were the two largest recipients of campaign contributions from the beleaguered company, and the only politicians to garner six-figure amounts from AIG in 2008 — $103,100 for Sen. Dodd and $100,332 for presidential candidate Obama.
AIG, which has received $170 billion in taxpayer cash from the federal government since September, gave more than $585,000 to Congressional and presidential candidates last year, favoring Democrats 3-to-1 over Republicans.
In unrelated news, Sen. Dodd proposed legislation requiring AIG political gifts to be returned to the U.S. Treasury, “exempting only those campaign contributions made before November 4, 2008.”
The senator’s office immediately issued a statement declaring that Sen. Dodd was not aware that he had proposed such the exemption.
——
the original link at my nickname.
Brett Bellmore - March 17, 2009 at 8:56 pm
It’s pathetic watching our government resorting to the same nasty tactic of every tin pot dictatorship: When you’ve done something to piss off the people, get them mad at somebody else, to make them forget what you’ve done.
This is a deliberately orchestrated two minute hate, for the specific purpose of distracting a public which was starting to look for somebody to blame, and starting to look in the government’s direction. I only hope that, after a few AIG employees have been murdered by the mobs, that gaze will return to Congress, and settle there.
Where it belongs.
A.W. - March 19, 2009 at 8:51 am
More I learn about this, the more outrageous this gets.
First, do you want to know how these “bonuses” came about? Let me explain. AIG has a number of divisions, some profitable, some not so much, some that blew a hole in their profits. So AIG decided that it needed to end its business in big loser areas. Ending the business is no easy task, and worse yet, the plan was to then terminate the employment of all the people in those divisions. So they came to those people and said, “look, we can see why you may want to find another job and leave our employment before the work is done, as is your right. so in order to encourage you to stay on, and help us wind down these divisions, we promise that if you do stay on until the end, we will pay you these bonuses.” in other words, these people relied, to their detriment on the promise of those payments to remain on until the end and did exactly what was asked of them. And now congress wants to take away the money that they earned. nice.
Indeed, not only did they earn it, but congress specifically promised to honor it in the Stimulus package. “What?” the dems say collectively in congress, “THAT was in there?” yes, well maybe next time you idiots in congress should have read the law you were passing, first. And gee, maybe you shouldn’t have let the corrupt Chris Dodd propose any amendments.
Oh, and lets note that the democrats are ready to shred the constitution again. After trying to give DC full representation without either 1) making them a state or 2) amending the constitution, and trying to keep Roland Burris out of his seat, now they are going to tax those bonuses at 90%. unbelievable. Let us hope and pray the federal courts will not allow these shenanigans. You remember that for future reference next time you hear a dem complain that Bush shredded the constitution. Bush didn’t shred the constitution, but let’s say for the sake of argument that he did. Then he did for the sake of national security. by comparison the democrats do it just for political expedience. which is worse?
A.W. - March 19, 2009 at 8:53 am
Oh, and beating up on Liddy, who came in to clean up this mess and is only doing the job for $1 a year? classy.
Diana - March 20, 2009 at 8:57 am
Brett: maybe you should “gaze” at the White House too?
Leave a Reply