Bailouts, bonuses, and the return of unjust gains.

• Author: Thomas, Tracy A.

In March 2009, ailing insurance giant American International Group (AIG) triggered a national outcry when it paid out $165 million in government bailout funds for employee bonus incentives. (1) President Obama called the bonus payments an "outrage" and promised that his administration would "pursue every single legal avenue to block these bonuses and make the taxpayers whole." (2) He chastised the firm for its audacity of using borrowed taxpayer monies to reward financial recklessness and greed. This was the same company, of course, who within days of receiving its first infusion of government cash in September 2008, sent its executives on a half-million dollar boondoggle retreat at a fancy desert spa. (3) And just several months after the initial fiasco, AIG tried to award $265 million in further bonuses, (4) adding to performance bonuses of $454 million paid to employees and executives in 2008. (5) It was just over a year ago when AIG turned to the government for its survival. The government stepped in to assist AIG when the company faced imminent death from its risky financial derivative products that were backed by precarious mortgages. (6) Fearful that the toppling giant would trigger a cataclysmic domino effect, the government authorized the bailout funds to keep AIG, and the entire U.S. financial sector, afloat. (7) The government agreed to loan AIG the money, now totaling over $173 billion, collateralized with AIG's assets and an 80% equity ownership of the company. (8) The first infusion of cash to AIG was authorized by the Federal Reserve in September 2008, supplemented with funds authorized in October by Congress in the $700 billion bailout bill, the Emergency Economic Stabilization Act (EESA), which established the Troubled Assets Relief Program (TARP).

As a result of the AIG bonus debacle, the President and Congress took several steps to try and avoid these problems in the future. In the EESA, Congress gave the Treasury Secretary the power to require these troubled financial institutions to meet appropriate standards for executive compensation, but did not directly prohibit the type of employee bonuses at AIG. (9) The subsequent American Recovery and Reinvestment Act (Recovery Act), passed in February 2009 after the transition to the Obama administration, added significant new restrictions for highly-paid executives of financial institutions that receive TARP assistance, including prohibitions against paying bonuses, retention awards, or incentive compensation, except as payments of long-term restricted stock. (10) President Obama also installed Kenneth Feinberg, former special master of the 9/11 Fund, as the pay czar to oversee all employee bonuses and payments for companies receiving large amounts of bailout funds, including AIG. (11)

AIG's loophole for its past payments is that the Recovery Act contains an express exception permitting bonuses that were payable pursuant to written employment contracts executed prior to the passage of the act. (12) AIG argued that its incentive payments were issued pursuant to pre-TARP employment contracts and thus were mandatory. Not everyone agreed, with legal commentators noting many situations in which AIG would not have been obligated to perform under the contract, such as the employee's failure to meet performance standards, impossibility caused by the eminent bankruptcy, or the employee's unclean hands. (13) Yet, technically immune from the legal restrictions, AIG sought to pay additional bonuses of even larger amounts in July 2009--though it subsequently thought better of the payments and decided to hold off. (14) Other bailout firms as well, like Citigroup and Bank of America, used taxpayer assistance to pay financial rewards to employees. (15) The extravagance thus continues, with little change in the motivations or operations of Wall Street. But everyone and their congressperson seem to appreciate that AIG has done something wrong here. AIG's flaunting of its newfound government riches in the face of desperate taxpayers losing their homes, jobs, and retirement funds raises the collective ire and seems to demand some type of response.

Congress reacted quickly to the populist outrage, initially agreeing with the President and proposing a bill "to require the Secretary of the Treasury to pursue every legal means to stay or recoup certain incentive bonus payments and retention payments made by American International Group, Inc." (16) The House also took more strident measures, seeking to recoup the money through a 90% excise tax on the employee payments. (17) The House Judiciary Committee responded to the AIG-like extravagance with the aptly-named "End Greed" Act (End Government Reimbursement of Excessive Executive Disbursements), though it was quickly defeated. (18) The End Greed Act would have authorized the Justice Department to sue for the return of bonuses given to employees of companies that have received more than $10 billion from the government and authorize the Attorney General to limit executive compensation at ten times the average non-management employee, as a company would have to do in bankruptcy. (19) The End Greed Act was modeled on principles of bankruptcy law and fraudulent transfer cases where a person transfers his assets to a friend rather than repaying debts or where an asset transfer is made by an entity in a precarious financial condition in exchange for less than reasonably equivalent value. (20) These legislative options, however, were quickly squelched, leaving AIG essentially immunized from its past wrongdoing.

The question remains whether existing legal avenues are available to curtail the continued bilking of taxpayer funds. A good solution might have been to revise the terms of the loan to prohibit payments of bonuses. This reformation type of remedy would have rewritten the original deal to restrict the use of bailout funds for bonuses or executive payments. However, reformation requires an original meeting of the minds in agreement on the terms, which was mistakenly omitted from the written contract. (21) Here, there was no mistake. The agreement between AIG and the government contained no restrictions on the use of the funds. Thus, reformation and other more typical contract remedies like damages are unavailable here in the absence of a breach by AIG.

One possible answer lies with the remedy of restitution. Restitution, based on unjust enrichment, is a remedy directed at the defendant that requires the wrongdoer to return all ill-gotten gains. (22) The goal is to return the defendant to the position it would have been in but for the wrongdoing, and prevent it from profiting at the plaintiff s expense. While some might consider the idea of an unjust enrichment remedy a "hail Mary" pass, (23) this long shot provides a good analytical foundation to funnel the public outrage towards a legal resolution based on justice.

RESTITUTION

Restitution is aimed at requiring the defendant to disgorge all...