Obama's best legal argument for taking back the AIG bonuses.

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March 17 2009 9:27 PM

Unjustly Enriched

Can Obama take back the AIG bonuses?

White House press secretary Robert Gibbs is not a lawyer, nor does he play one on TV. So when just about every question at Tuesday's afternoon briefing concerned bonuses at insurance giant AIG, Gibbs had a nonanswer at the ready. "I'm not a contracts lawyer," he said at one point, later explaining that he was "not a contract lawyer," either. When asked whether the president could simply deny more money to AIG unless it scrapped bonuses, he repeated: "Again, I'd refer you to a contract lawyer, which I'm not one."

So I took up Gibbs up on his offer and called up a contract lawyer or two. My question: Is there any way for the government to recoup the $165 million in bailout money that went to AIG bonuses?

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The frustrating yet unsurprising legalistic answer: maybe.

Every contract lawyer and his mother have a theory about how the government can get taxpayer money back. Some say you can cite the legal doctrine of "frustration," which says that you can back out of a contractual deal because of unanticipated, uncontrollable circumstances. The problem there is that AIG and the government clearly anticipated its possible failure when they signed the bailout contract. (It's also one reason the bonuses were so high, since employees had plenty of incentive to leave the company.) Another doctrine, called "impracticability," says you can breach a contract if you're suddenly unable to hold up your end of the bargain. For example, if AIG simply couldn't afford to pay the bonuses, it might be able to back out and give the Treasury back its money. But AIG, in part because of the government bailout, has plenty of cash to go around. Lawyers have also cited "unconscionability" as a potential defense—to say that a contract is so outrageously unfair that courts should not enforce it. But that usually presumes a lack of knowledge by one party. (For example, it protects poor people who sign horrendous mortgage deals.) Again, both AIG and the Treasury knew what they were getting into.

The government's best hope—although still a long shot—may be a legal concept called "unjust enrichment." Unjust enrichment belongs to a set of principles called equity law, which nonlawyers might just refer to as fairness. It basically says that you can sue someone if he took your money unfairly. For example, if I catered your party but didn't get paid, I could sue you—even if we never signed a formal contract. It also works the other way around: If you paid me to cater your party next week but I never showed up, you could claim I was unjustly enriched, since I never performed the service for which I was paid.

Unjust enrichment usually applies in the absence of a contract. But, as part of equity law, it could also override a contract if the existing law is deemed insufficient. The government could argue that AIG employees, some of whom were responsible for selling bad loans, don't deserve to be rewarded for bad behavior. Moreover, to reward them with taxpayer money—the money of the victims of their mistakes—is the very definition of unjust enrichment.

This approach is, admittedly, a Hail Mary. The theory of unjust enrichment is "not boundless in the sense that whenever you think something is unjust you can go and undo it," says Frank Snyder, a law professor at Texas Wesleyan University. But the vagueness of the concept allows for flexibility. If the lawsuit ever made it to court, its outcome would depend largely on the whims of the judge or jury. Unjust enrichment laws vary by state, but in general they merely require that one party be enriched (in this case, AIG), another be impoverished (taxpayers), and that there be no remedy provided by law.

OK, so it's not the open-and-shut legal case Obama is looking for. And as some have argued, it may be cheaper to pay the bonuses than to block them and pay for ensuing litigation. But with an outraged citizenry and an administration searching for answers, the unjust enrichment argument might be worth exploring.

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