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Geithner’s Other Hot Mess: Taxpayer Seeks Divesture of Billions from AIG Alleging Funding of Islamic Insurance Subsidiaries Violates the Constitution

Res ipsa loquitur's picture




 

A case that is beginning to get more attention, and is quickly becoming another thorn in Mr. Geithner’s side is Murray v. Geithner, CV 08-15147, which is in the U.S. District Court Eastern District of Michigan, Southern Division. Having lost a Motion to Dismiss the plaintiff’s case based on a lack of standing, and also under a failure to state a claim, as well as subsequently losing a motion to obtain a certificate of appealability for an interlocutory appeal, Mr. Geithner now faces the possibility of a deposition as well as discovery in a case that perhaps was seen as a big “nothingburger”, until just a few weeks ago.

Plaintiff Kevin J. Murray is described as a federal taxpayer, United States Marine and a practicing member of the Catholic faith. The only named defendants at this point are Timothy F. Geithner and the Board of Governors of the Federal Reserve System. Murray alleges that taxpayers’ “appropriated funds are being used to finance Sharia-based Islamic religious activities in violation of the Establishment Clause” because of AIG’s involvement in Sharia-compliant financing, such as its expansion into the Takaful Insurance field. Murray asserts that the unregulated appropriation of funds to AIG was not spent in accordance with the Constitution and is therefore, impermissible. (Tinfoil hat fans should note that the Department of Treasury hosted a Islamic Finance forum with the Islamic Finance Project of the Harvard Law School in November 2008). As such, among other relief, Murray seeks the divesture of taxpayer dollars.

As ZH readers may recall, the Board of Governors for the Federal Reserve System obtained a majority ownership interest in AIG on behalf of the U.S. Government by  authorizing the Federal Reserve Bank of New York (FRBNY) to create a credit facility. This permitted AIG to obtain an $85 billion dollar credit line which was collateralized by the company’s assets. AIG then became a party to a credit agreement that provided AIG pay interest and fees to FRBNY, and issue Series C preferred stock to the AIG Credit Facility Trust. This Trust held the stock for the benefit of the United States Treasury. The Trust basically gave the holders of this stock, about 77.9% of dividend payments and aggregate voting power of the common stock.

On or about November 25, 2008, the Treasury Secretary used his powers under the Emergency Economic Stabilization Act of 2008 to buy $40 billion of AIG Series D preferred shares, along with warrants to buy a number of common stock shares of AIG equal to about 2% of the issues shares as of the purchase date. These proceeds were used to pay down a portion of the FRBNY credit facility, leaving the credit facility about a $60 billion line of available credit. When AIG filed its Form 8-K with the SEC in March 2009 it was asserted that the Trust was overseen by three independent trustees that will hold a controlling interest in AIG. The interests of the Trust may not be the same as AIG’s interests and those of AIG’s minority shareholders.

Murray subsequently filed his Complaint as a federal taxpayer with an interest in seeing that Treasury funds were spent in a manner consistent with the Constitution. Murray alleged a violation of the First Amendment’s Establishment Clause, which does not permit Congress to use its taxing and spending power to fund religious groups or activities.

Because the taxpayer standing issue is so easy to attack, just like any plaintiff, Murray faced a motion to dismiss based primarily on standing. The fascinating part is that he survived the motion because the Court found that this was a rare instance by which Murray had taxpayer standing. To have taxpayer standing, a person must meet a two part test: the taxpayer can only allege the unconstitutionality of exercises of congressional power under the taxing and spending clause of Article 1, section 8 of the Constitution, and the taxpayer must demonstrate that the challenged enactment exceeds specific constitutional limits on the exercise of Congress’ taxing and spending powers. Flast v. Cohen, 392 U.S. 83, 102-03. (1968). However, it is “not sufficient to allege an incidental expenditure of tax funds in the administration of an essentially regulatory statute”, nor is it adequate to merely state that the enactment is generally beyond the powers delegated to Congress by Article 1, section 8.  Id.

In determining that Murray had taxpayer standing, the Court looked at whether the Emergency Economic Stabilization Act of 2008 (EESA) authorized or mandated expenditures related to the nexus between Murray’s taxpayer status and the type of act Murray questioned. The Court found that the EESA broadly empowered the Secretary of Treasury and did not specify which institutions should receive aid. See 12 U.S.C. section 5201 and section 5211. Neither party disputed that Congress enacted the EESA under the taxing and spending clause. As such, Murray met the first part of the test.

Moreover the EESA authorizes the expenditure of funds, but did not specify the manner  which the funds were to be distributed, and to whom. Although the Secretary of the Treasury directed where and to whom these funds went, (not Congress), at heart, the Murray case is about “appropriated funds [to AIG] being used to finance Sharia-based Islamic religious activities in violation of the Establishment Clause.” See Murray v. Geithner, 2010 U.S. Dist. LEXIS 8415 (ED MI, May 26, 2010) at page 13; See Bowen v. Kendrick, 487 U.S. 589 (1988) 619–20 (disbursement of funds under the AFLA, pursuant to Congress’ taxing and spending powers and claim about how funds being used were sufficient to create taxpayer standing). Thus, Murray met the second part of the test and successfully withstood the challenge to his standing to bring his case to court. However, the Court did find that the EESA did not violate the Establishment Clause on its face, because it did not mention religion or religious institutions.

While the Court empathized with the defendants as: “the circumstances of this case are historic, and the pressure upon the government to navigate this financial crisis is unfathomable”, the Court stated that “[t]imes of crisis, however, do not justify departure from the Constitution.”  Indeed, the Court briefly fleshed out several troubling aspects of this case, which led to the decision to deny the defendants Motion to Dismiss. First, as the majority shareholder, the US Government , pursuant to the EESA, “injected tens of billions of dollars, without restricting or tracking how… this money was spent” . Second, at least two of AIG’s subsidiary companies practice Sharia compliant financing, one of which was unveiled after the influx of government cash.” (In December 2008, another AIG subsidiary announced the creation of a Takaful Homeowners Policy). Third, although $40 billion from the government was used to pay down the $85 billion credit facility, the credit facility retained $60 billion in available credit, suggesting that AIG’s press release was incorrect. Finally, the government co-sponsored forum about Islamic finance took place after an AIG majority interest was acquired by the government. These factors led the Court to determine that Murray’s case was not speculative and could raise the question of whether the government’s involvement with AIG created the effect of promoting religion. Id. at 15. As such, defendants’ motion was denied. No motion for reconsideration was filed.

Going Forward From A Backseat Driver’s View

 
Understandably, after this motion was denied the defendants filed a motion to ask that the Court certify the issue for an immediate appeal and for a stay of the case. The defendants were facing various discovery requests, including a notice for the deposition of defendant Timothy F. Geithner.  A motion to compel Geithner’s deposition was filed by Murray’s attorney, but was adjourned. Currently a letter brief requesting guidance on the motion to compel depositions is pending. Unfortunately for the defendants (but probably as expected), their motion to certify the issue for interlocutory appeal was denied on February 2, 2010. This ought to lead to some movement with respect to the motion to compel.

Given the lay of the land, it may make sense to consider the possible scenarios going forward and make a business decision that makes both strategic sense and public relations sense to the defendants. In Bowen v. Kendrick, 487 U.S. 589, 621 (1988), our Supreme Court advised the district court that if there was a violation of the Establishment Clause, then the district court should fashion an appropriate remedy to directly address the violation. Thus, the defendants face that possibility in this matter, and cannot be certain of what that remedy would be or the results that would follow.

Here is one possible conundrum if the district court ultimately determines there was a violation of the Establishment Clause, in this matter. In Bowen, the Supreme Court advised the district court to look at “whether in particular cases AFLA aid has been used to fund "specifically religious activit[ies] in an otherwise substantially secular setting." In another Supreme Court case called Hunt v. McNair, 413 U.S. 734 (1973) the Supreme Court found it “important that the conditions on which the aid was granted were sufficient to preclude the possibility that funds would be used for the construction of a building used for religious purposes.”

In the instant matter, it would be important for the court to look at whether the Secretary of the Treasury permitted AIG to use funds in a manner that have an explicitly religious content, or are designed to inculcate the views of a particular religious faith.  Did this have the primary effect of advancing religion? If there was eventually a determination that this did violate the Establishment Clause, it has been suggested by Bowen that the appropriate remedy, at the minimum, would be to “require the Secretary to withdraw such approval.” Certainly other, more draconian remedies are available, which may include the elimination of any branch of AIG that is found to violate the Establishment clause.

D’oh! What a hot mess that could lead to. The implications for the Trust, AIG’s interests, and/or those of AIG’s minority shareholders, may not be pleasant. Worse, the case law with respect to what a remedy would be in the event such a determination is made, is not particularly favorable and creates a great deal of uncertainty that would perhaps be best avoided by choosing one’s own poison, so to speak.

I would argue this is so because there is no inherent way to separate the baby from the bath water. How would one, with respect to AIG’s Sharia-based Islamic religious compliant financing, possibly accomplish this? With respect to Takaful insurance, it appears unfeasible. See Mitchell v. Helms , 530 U.S. 793 (2000); See also Lupu and Tuttle, The Faith-Based Initiative and the Constitution, 55 DePaul L. Rev. 1, 89-102 (2005)

Hypothetically speaking, it might make sense to consider how to make this issue moot, limit discovery fishing expeditions, and/or avoid judicial remedies. In short, selling off the portions of AIG involved in Islamic finance ought to be under consideration. Clearly, another layer of separation is needed and I have a feeling there might be a TBTF buyer out there some where interested in acquiring those subsidiaries.

If these were sold off at a price that benefits the taxpayers, then the intermingling of taxpayer funds and religion can be “fixed”. Perhaps it can be spun as a benefit to the taxpayers that they were paid back and even made a profit off this. Could the defendants then argue “no harm, no foul” and that the issues in the lawsuit are moot? Well, it probably makes a better argument than some of the TEOTWAKI arguments currently being trotted about.

Also, I assume that Murray and his legal team are realistic in what a Court would do to craft a legal remedy for him in the first place on this issue. He simply isn’t going to get all the taxpayers’ billions of dollars divested from AIG. Prior Supreme Court case law suggests a less dramatic remedy. Regardless, selling off that part of AIG that is really at issue in this case, ought to be explored if the defendants determine this case has legs.

On the other hand, if I were the plaintiff, I might consider filing a summary judgment motion solely on the issue of whether such funding to the AIG Takaful Insurance subsidiaries violated the Establishment Clause. The district court has laid the matter out rather clearly. Maybe a direct tie needs to be made between these subsidiaries and the actual injection of taxpayer dollars, but otherwise, where is the question of fact? If it is not granted, then at least the adversary’s arguments on these limited issues are more fully exposed and can be fleshed out later in discovery. Of course, the drawback would be having to re-file this again later, but having to meet a higher threshold to win the motion.

At the minimum, if it has not occurred already, it makes sense to make the business decision of sitting down with Murray and finding out what he really wants (probably part of his $40 billion back). In the Bowen matter on remand, the parties sat down and resolved the matter amicably and in a productive fashion. Clearly, whether the parties can manage that in this matter, remains to be seen.

 

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Wed, 02/10/2010 - 07:20 | 224705 Anonymous
Anonymous's picture

Can we also use this same tactic to prevent the funding of the Global Warming religion?

Wed, 02/10/2010 - 05:51 | 224676 Ned Zeppelin
Ned Zeppelin's picture

Great, great post. Fascinating. File under the BofA case in cases to watch.

Wed, 02/10/2010 - 05:36 | 224668 aus_punter
aus_punter's picture

great analysis

Wed, 02/10/2010 - 01:05 | 224550 BlackBeard
BlackBeard's picture

Sounds like someone just did some doo doo on Timmay's chest!

Wed, 02/10/2010 - 03:32 | 224638 Anonymous
Anonymous's picture

how can you tell?

Wed, 02/10/2010 - 01:32 | 224501 tom a taxpayer
tom a taxpayer's picture

A taxpayer can have standing? Pinch me, I must be dreaming.

One person, a lowly taxpayer, can make a difference?

Is the genie out of the bottle?

Is the cat out of the bag?

Will miracles never cease?

Hallelujah! 

Kevin Murray is a hero. The Court is a hero. They established a basis for the taxpayer to have standing.

Beyond this particular case re govt funding of religious activities thru AIG, other taxpayer(s) now have the green light and road map to take on other unconstitutional exercises of taxing and spending under the Hank Paulson and Tim Geithner Fed and Treasury Department machinations and taxpayer bailouts of Wall Street and foreign banks.

"To have taxpayer standing, a person must meet a two part test: the taxpayer can only allege the unconstitutionality of exercises of congressional power under the taxing and spending clause of Article 1, section 8 of the Constitution, and the taxpayer must demonstrate that the challenged enactment exceeds specific constitutional limits on the exercise of Congress’ taxing and spending powers. Flast v. Cohen, 392 U.S. 83, 102-03. (1968). "

How about a class action lawsuit for the taxpayers...massive clawback from Wall Street and foreign banks.

Since Lloyd Blankfein and Goldman Sachs are doing God's work, I suppose a taxpayer can use the same basis as Murray to sue Geithner and Hank Paulson for unconstitutional government funding of religious activities at Goldman Sachs.

Thank you, Res ipsa loquitur.

 

Wed, 02/10/2010 - 07:08 | 224702 jeff montanye
jeff montanye's picture

john hussman has spent some time analyzing the (un)constitutional issues of the spending of funds by the treserve to underwrite fannie and freddie, especially the christmas announcement that this underwriting has no limit (seemingly contrary to the original congressional authorization and hence an unconstitutional usurpation of congress's power to spend by said treserve).  check out hussman funds about two or three weeks back.

Fri, 02/12/2010 - 20:42 | 229306 tom a taxpayer
tom a taxpayer's picture

 

 

Jeff - Thanks for the info. I found that Hussman report at:

http://www.hussmanfunds.com/wmc/wmc091228.htm

 

 

Wed, 02/10/2010 - 00:44 | 224528 Anonymous
Anonymous's picture

"Will miracles never cease?"

What else do you expect when the Marines take on the job?

Wed, 02/10/2010 - 00:14 | 224499 Anonymous
Anonymous's picture

The court or lawyers for both sides might find a way to resolve only Murray's stake in this case, but if they do, it would open a floodgate of litigation against Geitner, which would probably end up as a massive class action lawsuit. Can you imagine if 50 million americans joined in a class action lawsuit against Guitner for his actions???? WHOAH, now THAT would be one monumental statement!!

Wed, 02/10/2010 - 00:10 | 224490 Anonymous
Anonymous's picture

Law Offices of David Yerushalmi, P.C. presents online video demonstration of how Timothy Geithner as head of the NY Fed created a money laundering scheme to acquire 77.9% of AIG

http://atlasshrugs2000.typepad.com/atlas_shrugs/2010/02/shari-finance-un...

Wed, 02/10/2010 - 00:03 | 224479 Anonymous
Anonymous's picture

What about all the hundreds of millions in cash we're handing out to the Musllahs in Iraq for "community organizing"?

Wed, 02/10/2010 - 13:48 | 225121 Anonymous
Anonymous's picture

What about the billions in military aid for Israel?

Wed, 02/10/2010 - 00:01 | 224474 Missing_Link
Missing_Link's picture

I am hearing a Budweiser radio commercial in my head:

"Here's to you, Mr. Sues The Secretary of the Treasury and the Board of the Federal Reserve Because Their Backdoor Bailout Of AIG With Taxpayer Money Supports Sharia Financing  ..."

... "Mr. Sues The Secretary of the Treasury and the Board of the Federal Reserve Because Their Backdoor Bailout Of AIG With Taxpayer Money Supports Sharia Financing Guy!"

Wed, 02/10/2010 - 05:50 | 224675 Ned Zeppelin
Ned Zeppelin's picture

now THAT's funny

twisted, but funny

LOL

Tue, 02/09/2010 - 23:58 | 224473 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Notes-

-Establishment clause

-As ZH readers may recall,

-On or about November 25, 2008, the Treasury Secretary...was no longer a republican and this is important!

-Murray is a pimp nuff said

-"the Court stated that “[t]imes of crisis, however, do not justify departure from the Constitution.”"

-Murray and his legal team are realistic in what a Court would do to craft a legal remedy for him in the first place on this issue. He simply isn’t going to get all the taxpayers’ billions of dollars divested from AIG. Prior Supreme Court case law suggests a less dramatic remedy. Regardless, selling off that part of AIG that is really at issue in this case, ought to be explored

-case to watch!!!! stay tuned to ZH, and watch gold move too ;)

Wed, 02/10/2010 - 00:23 | 224506 Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

Um looks like you forgot the words "I assume" before Murray and his legal team. at least take better notes.

Tue, 02/09/2010 - 23:57 | 224472 Anonymous
Anonymous's picture

very high quality reporting on a relevant and somewhat technical issue....the government, if it were smart, would divest but i think the usa government wants to evangelize for islam....

in any event, go murray go!!!

Tue, 02/09/2010 - 23:54 | 224468 Anonymous
Anonymous's picture

Pamela Geller at Atlas Sbrugs http://atlasshrugs2000.typepad.com/
broke this story several months ago and has covered it extensively. After looking at her site I am convinced the US has much bigger problems than just the economy.

Wed, 02/10/2010 - 00:28 | 224513 Cindy_Dies_In_T...
Cindy_Dies_In_The_End's picture

PG is extremely too far right for my taste, but it takes a village, I suppose.

Wed, 02/10/2010 - 08:08 | 224713 Anonymous
Anonymous's picture

Maybe, but Pamale Geller did break the story. Politics aside,she is pretty careful with her facts. Her blog is a good read

Tue, 02/09/2010 - 23:42 | 224456 ChickenTeriyakiBoy
ChickenTeriyakiBoy's picture

Excellent analysis, Res ipsa. As for cleaving off the AIG unit in question, would this really stymie discovery fishing? If the deed was done, does it matter whether ownership has been shifted elsewhere? Also, regarding a sit-down to determine a remedy, this guy is clearly politically motivated--perhaps rightly so although I would like to see more evidence that this group within AIG benefited from taxpayer money before making that judgment. So if it is political ends that the plaintiff seeks, and not some nominal settlement that corresponds to his minimal, personal contribution to the AIG bailout, then what kind of resolution could really be expected from a sit-down? What was the amicable resolution in Bowen?

Tue, 02/09/2010 - 21:48 | 224354 Anonymous
Anonymous's picture

Geither, Paulson, Summers, Bernanke should all go to jail.

This whole god damn country is a mess...they do absolutely nothing in the name of the oaths they took!

The Indymac Slap in our Face. 02.08.10

http://www.thinkbigworksmall.com/mypage/player/tbws/23088/1540466

Do NOT follow this link or you will be banned from the site!