After a years long investigation New York Attorney General Letitia James sued Donald Trump, various members of his family, the Trump Organization, and and various other Trump owned business organizations alleging a pervasive pattern of business fraud. Consistent with the statute being sued under the relief James sought included dissolution of the Trump Organization and related companies. Yesterday the judge granted a partial summary judgement in favor of the state of New York that would do exactly that. You can read that decision HERE.
This article will analyze the judges decision in some depth and detail. The judge spiced up the decision with some interesting zingers, so along the way we will discuss everything from Groundhog Day, to Saudi Arabian influence peddling, to Chico Marx in Duck Soup.
Summary Judgement. What It Is And The Standard For it
As with criminal cases the jury is the usual determiner of facts in a civil case. However, in a civil case the presiding judge can rule on the facts when there is no credible dispute over the facts. This is called “summary judgement” and it can be about all of the case, or part of the case. This was for part of the case, more on which part later. Because of the summary judgement the plaintiff (the State of New York) need no longer prove to the jury what the judge has ruled on. The state can now focus its case on the more narrow, remaining issues.
Summary judgement is appropriate when there is no material fact in dispute, and no reasonable jury could find otherwise, so plaintiff is entitled to judgement as a matter of law. To avoid summary judgement Trump needed only to establish that there was a plausible fact question, requiring the jury to resolve, on the specific fraud issues the court ruled on. Trump failed to meet even this very low bar.
Trump certainly tried. In his own deposition testimony, and through testimony of expert witnesses, Trump’s attorney tried to create the illusion of credible questions of fact that the judge would be compelled to leave to a jury. They failed.
The judge ruled, “this is essentially a documents case” and “the documents here clearly contain fraudulent valuations that defendants used in business, satisfying OAG’s [Office of Attorney General’s] burden to establish liability as a matter of law against defendants.”
Which brings us to our first fun zinger. The judge states that, “Defendants’ respond that: the documents do not say what they say; that there is no such thing as objective’ value; and that, essentially, the Court should not believe its own eyes.” The judge, apparently an old movie buff, then drops this footnote:
As Chico Marx, playing Chicolini, says to Margaret Dumont, playing Mrs. Gloria Teasdale, in “Duck Soup,” “well, who ya gonna believe, me or your own eyes?” -Footnote 9.
Allowing the documents to speak for themselves the judge ruled they allow for no material facts to be in dispute on the fraud question ruled on. Notably, the court found that Donald Trump, Donald Trump Jr., and Eric Trump (along with Trump Organization CFO Allen Weisselberg and Trump Organization a Senior Vice President) personally committed the frauds at issue and are individually liable for them.
The Applicable Fraud Statute
The judge ruled under New York Executive Law § 63(12). § 63 generally lays out the duties of the New York Attorney General. Paragraph 12 reads in part:
Whenever any person shall engage in repeated fraudulent or illegal acts or otherwise demonstrate persistent fraud or illegality in the carrying on, conducting or transaction of business, the attorney general may apply, in the name of the people of the state of New York, to the supreme court of the state of New York, on notice of five days, for an order enjoining the continuance of such business activity or of any fraudulent or illegal acts, directing restitution and damages and, in an appropriate case, cancelling any certificate [incorporating the business].
In short, upon a showing of persistent or repeated fraud the Attorney General can ask courts to provide restitution, and effectively dissolve the companies involved. That is exactly what the judge has done in this case.
The statute goes on to define what constitutes repeated or pervasive fraud but it is basically persistent or repeated use of a, “device, scheme or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions.”
Statements of Financial Condition And The Fraud Issue Ruled On
Which brings us to the documents in this documents case that evidenced this deception, misrepresentation (etc). To understand you need to first understand what Statements of Financial Condition (SFCs) are. When a big company attempts to get a loan the bank seeks to evaluate the risk of the loan. The risk of the loan is obviously a function of the financial condition of the company. The company, generally through its accountants, will give the bank a SFC detailing its income, liabilities, potential future liabilities, and its assets.
That last one, assets, is the issue here as those assets provide collateral for the loan. If the SFC fraudulently inflates the value of the company’s assets it deceives the lending bank into believing the risk of the loan is less than it is. Deceived in this manner the bank makes the loan on more favorable terms to the borrower (and less favorable terms to the bank) than would have been the case had the bank been told the truth about the value of the assets.
Getting a loan and having to prove their ability to repay it is something many Americans can relate to. Suppose you apply for a $250,000 loan from a bank. You offer as collateral your house, which you claim is worth $300,000. However, you know the house is not really worth that because it needs some sort of major repair. Accepting your representations the bank gives you the loan on favorable interest terms. You have defrauded the bank. This is true even if you fully payback the loan, because had the bank known the truth, it would have factored in the increased risk with a higher interest and have been paid back more.
This is essentially what Trump was accused of doing, and what the judge found Trump did. Trump, repeatedly and persistently, cause SFCs to be submitted that inflated the value of collateralized assets. This allowed him to secure loans on more favorable terms than the truth would have. In many cases the property assets at issue were under impairments substantially affecting their value that Trump did not disclose. In the words of the judge:
In defendants’ world: rent regulated apartments are worth the same as unregulated apartments; restricted land is worth the same as unrestricted land; restrictions can evaporate into thin air; a disclaimer by one party casting responsibility on another party exonerates the other party’s lies . . . and square footage [is] subjective.
That is a fantasy world, not the real world.
Of course, you may argue that it was Trump’s accountants that did this, not Trump or his company. Trump’s attorneys certainly did argue that. The only problem with that is the accountants can only go on what the Trump’s company gave them. Trump mislead his own accountants. The name of that big accounting firm, the Mazars Company terminated their dealings with this big client because he sent them false information. Mazars acknowledged the SFCs it prepared for Trump were “unreliable” because it was misled by Trump and the Trump Organization.
In standard language the SFCs prepared by Mazars make clear that it relies on accurate information from its client. In the words of the court, “the Mazars disclaimers put the onus for accuracy squarely on defendants’ shoulders.” After all, the SFCs were ultimately signed by Trump, he is responsible for them.
Example #1: The Trump Tower Triplex and Saudi Influence Peddling
Trump offered as collateral his apartment in Trump Tower where he had resided for decades. The apartment’s square footage is 10,996 square feet. In SFCs Trump claimed it was over 30,000 square feet resulting in an overvaluation of $114-$207 million. The misrepresentation continued even after Forbes Magazine called Trump out on it.
Trump’s response to this was to argue that square footage is “subjective,” reducing it to a matter of opinion. I think you can see why that argument would fail, particularly when the reported square footage is more than triple reality. In the words of the judge, “Good-faith measurements could vary by as much as 10-20%, not 200%.”
Trump also argued that such numbers cannot be truly inflated because maybe he could find a buyer in Saudi Arabia who would pay any price he would suggest. This prompted the judge to drop a footnote which reads:
This statement may suggest influence buying more than savvy investing.
Here we are, where Jared Kushner received $2 billion from the Saudis under very questionable circumstances.
For the record, Trump’s SFCs valued the apartment at $180,000,000-$327,000,000 for the years 2012-2016. The highest any apartment in New York had ever sold for at the time was $88 million.
Example #2: Seven Spring Estate
Repeated professional appraisals valued this property at $25-$30 million. An outlier appraisal said $56.6 million. Trump’s SFCs claimed it was worth (brace yourself) $291 million. Even under the favorable outlier valuation Trump inflated this property by over 400%.
Example 3: Trump Park Avenue
This residential property was subject to rent restrictions that, Trump did not disclose, resulting in an overvaluation of the property by up to 700%. Trump’s response to this one is also telling. Trump argued that it was not overvalued because the maybe possibly someday the city might remove the rent restrictions. In the words of the court:
SFCs are required to state “current” values, not “someday, maybe” values.
Example 4: Mar-a-Lago
Perhaps the most interesting example of all. In 1995 Trump signed a restriction on the property stating that it could only be used as a social club. This was amplified in 2002 with Trump signing a restrictive deed prohibiting:
the division or subdivision of the Property for any purpose, including use as single family homes, the interior renovation of the mansion, which may be necessary and desirable for the sale of the Property as a single family residential estate . . . In exchange for granting the easement, Mar-a-Lago was taxed at a significantly lower rate (the club rate) than it otherwise would have been (the private home rate).
Based on such restrictions the Palm Beach Tax Assessor valued the property at between $18 million and $27.6 million. For the same years Trump’s SFCs to lenders claimed the value at “between $426,529,614 million and $612,110,496, an overvaluation of at least 2,300%, compared to the assessor’s appraisal.”
Trump presented an expert witness who claimed the property was worth much more than even what Trump claimed on the SFCs. However, that was for “personal use as a residence,” prohibited by the deed.
Once again Trump stunningly argued that he was free to ignore those deed restrictions in the valuation because maybe someday he could convince Florida to remove them. In the words of the court:
This argument is wholly without merit. At the time in which the defendants submitted the SFCs, the restrictions were in effect, and any valuations represented to third-parties must have incorporated those restrictions; failure to do so is fraud. Assets values that disregard applicable legal restrictions are by definition materially false and misleading.
Example 5: The Trump Brand Premium
Trump inflated the value of various golf resorts he owned by up to 30% based on an alleged premium the properties could get on sale because they were tied to his name. Brand premium can be a real thing. However, in this instance the SFCs told the investors no such premium had been worked in. The SFCs said:
“The goodwill attached to the Trump name has significant value that has not been reflected in the preparation of this financial statement.”
I could go on. The court’s decision provides many more examples of repetitive and pervasive fraud proved by documents to have occurred and thus not a factual dispute to be resolved at trial.
There will be a trial, and it is scheduled to begin on October 2d. It will determine even more allegations for fraud for which the judge ruled a resolution at trial of the disputed facts is appropriate. However, this trial greatly simplifies what Letitia James has to prove at that trial.
Ongoing Fraud One Basis For Dissolution
Dissolving the corporation is pretty much the death penalty of remedies here. While the statute discussed above authorizes the court to do so it is within the discretion of the court to do less.
In November 2022 the court found there was considerable evidence presented by the Attorney General of fraud and issued an order partially seizing control of the Trump Organization to prevent further fraud. That order included appointing a judge to monitor activities of the organization.
That judge issued a report indicating that the Trump Organization continued to engage in fraud even while under these restrictions. In the words of the judge in this case:
Even with a preliminary injunction in place, and with an independent monitor overseeing their compliance, defendants have continued to disseminate false and misleading information while conducting business. This ongoing flouting of this Court’s prior order, combined with the persistent nature of the false SFCs year after year, have demonstrated the necessity of canceling the certificates [of incorporation].
The sheer arrogance of it all, the belief they were untouchable and above the law is staggering.
The icing on the cake for all this is that Trump’s lawyers were sanctioned by the court for frivolous motions practice. Folks this is really crazy.
Trump’s argument was that state lacked standing to sue because the state was not harmed by the fraud (only the lending banks were). It was a bad argument, because the statute discussed above clearly deems business fraud as a harm to the People of New York, conferring such standing. Even so, Trump made the motion, it was denied with the judge describing the argument as “frivolous.” Trump appealed this decision, and he lost. Sanctions were not imposed.
Trump made the motion again. The judge denied it again. Trump appealed it again. He lost again. Still, the court did not impose sanctions, though it sent a clear warning. The court stated that, “sophisticated counsel should have known better,” but declined to impose sanctions because the court had “made its point.”
Alas, in the words of the court, “apparently, the point was not received.” Trump for a third time demanded dismissal of the case on the same standing grounds. A clearly exasperated judge wrote:
One would not know from reading defendants’ papers that this Court has already twice ruled against these arguments, called them frivolous, and twice been affirmed by the First Department.
The judge also noted, and listed a bit of, the long history of sanctions in Trump cases, to include this case where Trump was sanctioned for frustrating discovery. The judge noted that, “Donald Trump, and his lawyers, are not sanctions neophytes. This is not their first rodeo.”
The judge imposed sanctions of $7,500 each on the five attorneys that signed the third frivolous pleading.
Where We Go From Here
First we go to trial next week on the remaining allegations. Allegations the New York Attorney General will have much easier time of proving with this notch on her belt.
The judge’s order states that the certificates incorporating the company are cancelled and gives the parties ten days to name up to three independent receivers to manage dissolution of the cancelled LLCs. That will likely be put on hold while Trump appeals.
If such appeal fails those receivers will be responsible for selling off the assets of the Trump Organization and related entities. Proceeds will be used to pay any financial penalties, imposed resulting from this decision and the trial, and to pay the costs associated with dissolving the companies and their liabilities. If any remains, Trump can get that.
This is obviously a crippling personal, business and financial goal for a man with a whole lot more in legal fees to pay. For the record, there is no potential for a pardon here. Pardons apply only to criminal cases, not civil cases such as this, and the federal pardon power of the President does not apply to state cases.
Will it move the political needle? I think not. A jury already found that Trump raped a woman and Trump world didn’t care at all.