NEW YORK (Reuters) - Former American International Group Inc (AIG.N) Chief Executive Maurice "Hank" Greenberg lost his appeal Wednesday in a lawsuit accusing the Federal Reserve Bank of New York of unlawfully bailing out the insurer at the height of the 2008 financial crisis.
The 2nd U.S. Circuit Court of Appeals in New York said the New York Fed's authority to address major threats to the economy justified the dismissal of Delaware breach of fiduciary duty claims by Greenberg's Starr International Co, which once held a 12 percent AIG stake.
Writing for a unanimous three-judge panel, Circuit Judge John Walker said a contrary ruling would compromise the New York Fed's authority to take action in "unusual and exigent circumstances," including "to rescue AIG from bankruptcy at the height of the direst financial crisis in modern times."
He said permitting state law claims such as Greenberg's to go forward would force the New York Fed to shirk its obligation to act in the public interest, and instead to act in the best interests of corporate shareholders, like the AIG shareholders on whose behalf Starr sued.
"In this case," Walker wrote, "Delaware fiduciary duty law cannot be applied to FRBNY's rescue activities consistently with adequate protection of the federal interests at stake in stabilizing the national economy."
AIG is based in New York but incorporated in Delaware and was once the world's largest insurer by market value.
Starr had accused the New York Fed of engineering a "backdoor" bailout for Goldman Sachs Group Inc (GS.N) and other Wall Street banks at the expense of AIG shareholders, by forcing the insurer to unwind bets on mortgage debt through hundreds of billions of dollars of credit default swaps.
The 2nd Circuit did not address whether the New York Fed exceeded its authority in rescuing AIG, whose $182.3 billion bailout began on September 16, 2008, one day after Lehman Brothers Holdings Inc went bankrupt.
Wednesday's decision upheld a November 2012 ruling by U.S. District Judge Paul Engelmayer in Manhattan, who had endorsed broad central bank power to address financial crises.
The lawsuit is one of two in which Greenberg, 88, and Starr have accused the government of shortchanging AIG shareholders out of tens of billions of dollars.
He has also said the New York Fed improperly let the U.S. Treasury take a since-divested 79.9 percent AIG stake without allowing a vote by diluted shareholders.
The second case is before the U.S. Court of Federal Claims in Washington, D.C., which handles lawsuits seeking money from the government.
There, Greenberg and Starr called the AIG bailout an illegal taking that violated the Fifth Amendment of the U.S. Constitution. A trial is scheduled for September 29.
Starr's lawyer David Boies in a statement said the 2nd Circuit decision addressed only a "narrow issue" of state law preemption and did not affect the constitutional claims in the Court of Claims case. He did not say whether Starr will appeal.
The New York Fed and its lawyer John Kiernan did not immediately respond to requests for comment.
AIG spokesman Jon Diat declined to comment. The insurer had asked that Engelmayer's dismissal of Starr's claims be upheld.
Greenberg led AIG for nearly four decades before his 2005 ouster.
The case is Starr International Co v. Federal Reserve Bank of New York, 2nd U.S. Circuit Court of Appeals, No. 12-5022.
Reporting by Jonathan Stempel in New York; Editing by Jeffrey Benkoe and Cynthia Osterman