Gruber & Ors v AIG Management France, SA & Ors

Under Connecticut law, deferred-bonus plan provisions must be construed from their text, read as a whole and applied to the circumstances that arise. Losses reduce deferred-compensation balances only to the extent that realised losses in the relevant financial-product book exceed available reserves and current-year net income. Annual excess losses do not carry forward, and plan accounts cannot become negative.

Where the plan requires subsequent restoration, the obligation is unqualified. The board must adopt a restoration plan when deductions are made, providing for full restoration with interest and payment within the specified period. A parent may be liable under Delaware alter-ego principles where it completely dominates the subsidiary, misuses the corporate structure, and thereby causes distinct fraud or injustice to an innocent third party. Honest belief that the subsidiary is acting within its contract defeats the relevant tort claims.

The claimants were former employees of companies within the AIG financial-products business. They claimed deferred bonuses under the Deferred Compensation Plan, the 2007 Special Incentive Plan and the 2008 Employee Retention Plan. The plans were governed principally by Connecticut law.

The central contractual dispute concerned the operation of the reduction-and-restoration provisions after AIG-FP incurred very substantial losses during the 2008 financial crisis. The claimants also alleged that AIG Inc was liable by piercing the corporate veil or for tortious interference with AIG-FP’s contractual obligations. The court determined the meaning and operation of the plans, the effect of the losses, and whether the parent’s conduct satisfied the applicable Delaware and tort principles.

1. Contractual construction. The plans were to be construed primarily by their language, read as a whole and in the circumstances of the transaction. The court would give effect to clear language and would not remake an unwise bargain. The plans were contracts governed by Connecticut law.
2. Reduction of balances. A positive plan balance represented an unsecured debt owed by AIG-FP. Realised losses in AIG-FP’s financial-product transaction book, including relevant AIGTG transactions, were the losses contemplated by section 4.01(b)(1). They were applied annually, first against reserves and current-year net income, then against plan balances pro rata, and finally against base capital. Current-year income meant net income after expenses, including interest on the Federal Reserve-backed facility. Losses did not carry forward, and plan balances could not be negative.
3. Restoration. Section 4.01(b)(3)–(6) imposed an unqualified obligation to restore deducted amounts in full, with interest. The board had to adopt a restoration plan when deductions were made, providing for restoration and payment in 2013. The possibility that restored balances might later be reduced did not remove the obligation to restore or plan for restoration. The 2013 lapse provision did not defeat the claims on the evidence and arguments before the court; in any event, damages could be claimed for wrongful deductions and failure to adopt a restoration plan.
4. Application. The 2008 and 2009 plan balances were properly reduced to nil, subject to any bespoke individual credits. The claimants therefore had no debt claims for those balances, but AIG-FP was liable in damages for failing to operate the restoration provisions. Certain bespoke credits might support further debt or damages claims.
5. Parent liability. The court accepted the Delaware alter-ego formulation requiring complete domination and control, misuse or manipulation of the corporate structure, fraud or injustice to an innocent third party, and resulting fraud or injustice distinct from the underlying breach. Although AIG Inc controlled the operation of the plans, the claimants failed to prove that the relevant decision-makers knew or did not care that AIG-FP was breaching its contracts. The claims against AIG Inc therefore failed.
6. Disposition. Judgment was entered against AIG-FP for damages to be assessed. The claims for debt relating to the 2008 opening balances and ERP credits, the claims against Banque AIG concerning those amounts, and all claims against AIG Inc were dismissed.

First-instance judgment in the High Court (Commercial Court). No prior appellate decision is stated in the judgment.