(Bloomberg) -- The U.S. government has grounds to demand thatAmerican International Group Inc. pay any significant damagesshould Maurice “Hank” Greenberg win his $25 billion claim thatfederal officials shortchanged investors in the 2008 bailout of theinsurer.

Greenberg and other investors who sued the government initiallyestimated damages at $25 billion. Later calculations put the figurecloser to $40 billion. The smaller figure would be the equivalentof more than the twice insurer’s $9 billion in net profit lastyear.

During any U.S. attempt to establish a legal right to the moneybased on an indemnity promise in AIG’s bailout agreement, taxpayerswould probably have to foot the bill initially. Damages would bepaid out of the so-called Judgment Fund, which is administered bythe Department of Treasury.

“It’s this bottomless financial pit that the government dipsinto when it has to pay a judgment,” said John Echeverria, aprofessor at the Vermont School of Law.

AIG isn’t a party to the class-action suit, which was filed byGreenberg’s Starr International Co. on behalf of him and about275,000 other AIG investors. As a condition of an $85 billionbailout loan, AIG’s management agreed to pay damages resulting fromlitigation tied to the rescue, according to U.S. court filings.

‘Financially Prudent’

“If I was the government, I would absolutely look to AIG and toanyone else to pick up some of the tab,” said David Zaring, aprofessor of legal studies and business ethics at the University ofPennsylvania’s Wharton School. “That would just be financiallyprudent.”

Still, pursuing AIG for reimbursement of damages would createthe awkward and legally unfavorable circumstance of putting the armon someone else for government conduct, Zaring said.

“It’s the government’s own actions that are being sued about,”he said.

AIG acknowledges in its most recent quarterly report that itmight have to pay the Greenberg damages: “A determination that theUnited States is liable for damages, together with a determinationthat AIG is obligated to indemnify the United States for any suchdamages, could have a material adverse effect on our business,” thecompany said in a filing.

In trying to collect a large judgment from AIG, the governmentwould be harming a company it said it had to save in 2008 toprevent catastrophic damage to the U.S. economy.

Government’s Choice

Stephen Aiello, a spokesman for Starr International, declined tocomment directly on who should pay damages. “This is up to thegovernment to decide how they want to handle this, if they lose thecase,” Aiello said.

Nicole Navas, a spokeswoman for the Justice Department, declinedto comment on how the government would respond to an adversejudgment. Matt Gallagher, an spokesman for New York- based AIG,declined to comment on the trial.

If the U.S. loses at trial, it may have a hard time collectingfrom what was once the world’s largest insurer. U.S. Court ofFederal Claims Judge Thomas Wheeler, who is hearing the case inWashington without a jury, said in a pre-trial ruling that Starrhad raised “legitimate questions about the viability” of governmentdefenses, including the indemnity clause.

Wheeler rejected a government motion to strike the defenses asinvalid, saying he wanted to hear more about them at trial. Starrargued the clause was invalid because the bailout agreement thatcontained it was illegally imposed on AIG.

Enforceability Doubt

It isn’t clear that the clause is enforceable, said JohnEcheverria, a law professor at the Vermont Law School who writesthe Takings Litigation blog. “I’ve never run across an indemnityagreement like that.”

The U.S. doesn’t have much practice getting reimbursement fromthird parties after making payments from the Judgment Fund,according to Nancie Marzulla, a Washington attorney who specializesin federal claims litigation.

“I’m not aware of any case where the government has gone after athird party and recovered for any damages” that were levied againstit, Marzulla said.

The trial began Sept. 29, and is now scheduled to concludebefore the Nov. 27 Thanksgiving holiday. The losing side is almostcertain to appeal the court’s decision and any final resolution isprobably years off.

Bernanke, Geithner

The case has featured testimony by former Treasury SecretaryHenry Paulson, former Federal Reserve Chairman Ben Bernanke andformer Treasury Secretary Timothy Geithner, who was head of theFederal Reserve Bank of New York when it bailed out AIG.

Starr claims the government cheated shareholders by demanding an80% equity stake in the company, after already having all thecompany’s assets as collateral, and by imposing a 14% interest rateon the $85 billion loan while charging other rescued companies lessthan 4%.

David Boies, Starr’s lead attorney, argued that U.S. officialsdidn’t have the authority under the Federal Reserve Act to demandequity or to discriminate against AIG with what he called anextortionate interest rate.

Responding to the multibillion-dollar damage claims, governmentlawyers argued that the real harm is zero because AIG’s alternativeto the bailout was bankruptcy.

AIG Defense

AIG has a possible defense to the government’s invocation of theindemnity agreement. It isn’t responsible for damages if theyresulted primarily from the government’s gross negligence orwillful misconduct, according to Elliott Stein, a financiallitigation analyst for Bloomberg Intelligence.

Wheeler could issue a ruling that the government is liablewithout awarding damages or without concluding it was grosslynegligent or engaged in misconduct, Stein said.

To assist in that outcome, the government might frame itsclosing arguments to try to minimize any finding of grossnegligence or misconduct, said Larry Cunningham, a law professor atGeorge Washington University who has co-authored with Greenberg“The AIG Story,” a history of the company.

“They could say, ‘If you do find that we violated the law, weacted in good faith,’’ Cunningham said. ‘‘We were trying to do theright thing.’’

The case is Starr International Co. v. U.S., 11-cv-00779, U.S.Court of Federal Claims (Washington).

--With assistance from Zachary Tracer in New York.

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