Lawsuit arguing AIG bailout is unconstitutional can proceed

A lawsuit arguing that the federal bailout of American International Group Inc. is unconstitutional will be allowed to proceed in a federal court in Michigan.

The decision, handed down last week in the U.S. District Court for the Eastern District of Michigan, was made after a judge determined it was unconstitutional for AIG to receive the bailout funds from the U.S. government because AIG has subsidiaries that sell insurance designed to comply with Islamic law.

The suit, filed in December by Kevin J. Murray—a Michigan resident, a former U.S. Marine and a Catholic—alleges the U.S. Treasury Department and the Federal Reserve Board violated the Establishment Clause of the First Amendment. Mr. Murray, who filed the lawsuit “as a taxpayer,” alleged that the “appropriated funds (to AIG) are being used to finance Sharia-based Islamic religious activities” and are therefore “constitutionally impermissible,” according to court documents.

At the time the suit was filed, the U.S. government took a nearly 80% stake in the troubled New York-based insurer. The government has given AIG about $182.5 billion in aid to help the insurer avoid bankruptcy.

In December after receiving federal bailout money, AIG announced that it would provide takaful insurance, or insurance that complies with Islamic law, in the United States. In such an arrangement, members contribute money to a pool to guarantee each other coverage against loss or damage.

Though AIG had offered takaful insurance internationally prior to its troubles, the fact that the insurer made it available in the United States after bailout funds were received provided Mr. Murray with standing to bring the suit, Judge Lawrence P. Zatkoff said in his opinion.

“These facts, taken together, raise a question of whether the government’s involvement with AIG has created the effect of promoting religion and sufficiently raise plaintiff’s claim beyond the speculative level.” Judge Zatkoff added: “The financial circumstances of this case are historic, and the pressure upon the government to navigate the financial crisis is unfathomable. Times of crisis, however, do not justify departure from the Constitution.”

--Business Insurance