Tuesday Talk*: Was $355 Million Proper?

Put aside Trump’s braggadocio, that he’s so very rich. He is, and he’s not. He’s a whole lot wealthier than me and, likely, you, but there are many who are far more wealthy. And as the case overwhelmingly proved, Trump can’t be trusted when it comes to his own wealth. He lies. A lot.

Put aside that Trump violated New York law by fraudulently inflating the value of his assets on loan applications. He did. A lot.

Put aside that Trump repaid the loans, albeit at reduced interest rates, and no bank suffered a loss of principal and interest, albeit at a lower rate, as a result of Trump’s fraud. The law under which the attorney general sued Trump does not require that any victim be damaged. Rather, only that the business engage in ongoing fraud. Trump’s did. A lot.

But was the amount too high, too low or just right?

On Friday, New York County Supreme Court Justice Engoron ordered Donald Trump to pay a staggering $355 million for repeatedly inflating asset values in statements of financial condition submitted to lenders and insurers. When the interest that Engoron also approved is considered, the total penalty rises to $450 million. All told, Trump and his co-defendants, including three of his children and former Trump Organization CFO Allen Weisselberg, are on the hook for $364 million, or about $464 million with interest.

On its face, a penalty of nearly half a billion dollars is hard to fathom given that no lender or insurer claimed it suffered a financial loss as a result of the transactions at the center of the case, which was brought by New York Attorney General Letitia James. But the law under which James sued Trump and his co-defendants does not require any such loss. The money demanded by Engoron’s 92-page decision, which goes to the state rather than individual claimants, is styled not as damages but as “disgorgement” of “ill-gotten gains.” It aims not to compensate people who were allegedly harmed by Trump’s misrepresentations but to deter dishonesty that threatens “the financial marketplace.”

Deterrence is the primary goal here. That means specific deterrence to stop Trump from continuing to engage in fraud, and general deterrence, to stop other businesses that might be inclined to follow Trump’s path down the fraudulent way. The mechanism of deterrence involves two components: First, disgorgement of ill-gotten gains, as a business cannot enjoy the fruit of its fraud. But second, merely disgorging unlawful gains would put the business back where it should have been had it not engaged in fraud. That’s hardly a deterrent if the worse that can happen is you end up where you would have been had you done business lawfully.

Accordingly, there must be something beyond merely putting a business where it would have been anyway. There must be some incentive not to engage in fraud. There must be some element of punishment. As for the statutory interest on judgments of 9%, that applies to everyone in New York and isn’t a punishment as a judgment debtor can avoid interest if he so chooses by paying the debt.

Whether it’s disgorgement or punishment, how much was the right amount? Granted, neither the notion of deterrence nor conducting business without engaging in fraud seems to apply to Trump. It helps when he can sell NFTs of his head on a body he never did and never will have or high-top sneakers that match his toilet bowl. Or when contributions to his campaign and PAC are used to pay off his personal debts. It’s easier to be rich when other people, poorer people, pay your bills.

But despite all of this, it’s not at all clear that Trump’s misrepresentations mattered to Deutsche Bank, a sophisticated lender that was hardly inclined to trust the valuations provided by putative borrowers and would have loaned money on the same terms regardless.

Did those deviations ultimately matter in the decisions that lenders and insurers made? Engoron’s summary provides reason to doubt that they did. Deutsche Bank, he notes, routinely “applied a 50% ‘haircut’ to the valuations presented by” clients, which a witness “affirmed was the standardized number for commercial real assets.” A defense witness opined that lenders generally just want to see “the engagement of a warm body of a billionaire to stand behind the loan in his equity infusion and capital.”

The question, then, isn’t whether you feel Trump is a lying, sniveling worm or a brave he-man with unfortunate bone spurs, but whether the judgment of $355 million was arguably appropriate or an outrageous excess imposed because Trump was, well, Trump?

*Tuesday Talk rules apply.

24 thoughts on “Tuesday Talk*: Was $355 Million Proper?

  1. Oskar

    I haven’t read the full opinion, only the Reason article.

    For general deterrence the difference between the interest rates paid and the calculated interest without the personal guarantee (which might or might not have been real), or $168 million, makes sense to me if it can be shown that was what he was supposed to pay. But that’s a big “If”.

    “Trump would have had to pay higher interest rates on the four loans, and neither the Ferry Point deal nor the Old Post Office renovation and sale would have happened.” also makes sense as a ding for ill gotten gains.

    “Deutsche Bank, he notes, routinely “applied a 50% ‘haircut’ to the valuations presented by” clients, which a witness “affirmed was the standardized number for commercial real assets.” is actually bonkers if the valuations are done by professionals paid for by the clients.

    Is NY real estate valuations based on vibes?

    1. Howl

      Fun factoid:
      Johnny Mathis’ first band was with high school friend Merl Saunders, a frequent collaborator with Jerry Garcia. Mathis gave a eulogy at Saunders funeral, thanking him for giving Mathis his first chance as a singer.

  2. Lee Keller King

    My law practice in Texas consists of quite a bit of real estate matters, both litigation and transactional. From my experience, and that of my law partner, if Trump can be found guilty under the New York statute, then nearly every real estate developer we have ever known could be, too.

    Developers almost always over value their assets when seeking a loan and undervalue them when tax time comes around (and both taxing authorities and lenders are fully aware of this). I have not followed the trial closely, but if the court used the tax appraisal for Mar Lago in its deliberations, then Mar Lago’s actual, fair market value is almost certainly much higher.

    So the question is, considering all the facts (including AG James’ campaign promises), was this a real prosecution, or a political one that targeted Trump because he is running for president? I don’t know, but it certainly will appear that way to many.

    As for proportionality of exemplary damages to actual damages, at first blush there appears to be none. I would not be surprised if this case ended up in the US Supreme Court on that issue and the Court has previously held that such damages can be unconstitutional if there is too great a disconnect between actual and punitive damages.

    1. Miles

      Of course people over value assets for loans and undervalue for taxes, but this wasn’t within the normal parameters of exaggeration. The valuations were wildly exaggerated, magnitudes beyond what ordinary developers would do. That’s not to say that using the tax valuation is a reasonable comparator, but this was not even in the same universe as normal.

    2. David

      Merely because a particular behaviour is common, doesn’t necessarily mean it shouldn’t be punished when caught, nor that it is unfair to focus on those who’ve done something more egregious.

      I’m told by many that not declaring everything at customs and/or misstating value is common. Many aren’t caught, and those that are may not face a big penalty (or they may – not my field!). But if someone engages in large-scale smuggling (of legal items but misstating values for customs in large transactions) that is much more deserving of punishment, and more serious punishment, of a behaviour that is commonly done by many.

      Similarly the example given of misstating values for taxes vs. loans may be common, may be commonly done by everyday individuals not just wealthy, but that doesn’t necessarily mean laws penalizing such shouldn’t be enforced, even if the focus is against the more obvious and large-scale offences rather than “everybody”.

      1. Mike V.

        “Merely because a particular behaviour is common, doesn’t necessarily mean it shouldn’t be punished when caught, nor that it is unfair to focus on those who’ve done something more egregious.”

        And how many other New York real estate developers are they investigating? None? This is more James fulfilling her campaign promise to get Trump.

        1. Ron

          Not sure about real estate devs, but James has sued numerous other businesses for the same fraud, so it’s not just Trump.

          Then again, James’ campaign promise compromises anything she does with Trump. She was stupid.

          1. Mike V.

            How many of those were cases where there were no real victims, and no one lost any money? And how many resulted in a fine all out of proportion to the loss?

            From what I’ve read and heard, there has never been a civil fraud case in New York where there was no loss and the “victims” denied being victims and said they’d willingly do business with defendant again.

            1. Oskar

              – If you take a loan at the bank without collateral you pay an interest of 9%+ on my side of the pond.

              – If you put up real estate as collateral you pay 5%+.

              The loss is the difference. More risk, more interest. If you lie about your financials or the worth of the property the bank takes a higher risk. If more people lie to the banks the banks will raise interest rates, to compensate for the higher risk of people lying, making loans more expensive for all.

  3. B. McLeod

    The case just looks like another facet of the lawfare that has been launched at Trump to try to bring down his candidacy for reelection. The behavior the court is punishing is a common behavior of real estate developers, which the banks are obviously well aware of. The prosecutor found a law that reaches the behavior, but only in the case of Trump. It will be interesting to see what the Appeals Division has to say about the conduct of this trial and the calculation of the penalties.

    1. Elpey P.

      “what the Appeals Division has to say”

      It’s ok if they knock it down. It only needs to be borrowed until November.

    2. Mike V.

      I have read that to appeal in New York state Trump has to post the amount of the fine and interest or a bond equal to that value. It smells of “Lets fine him so much he can’t afford to appeal.

  4. Pedantic Grammar Police

    A couple of old quotes come to mind; something about “show me the man and I’ll find the crime” and one about a ham sandwich. Trump plays the role of the “man” and the “ham sandwich” here. Only idiots and readers of the NYT are able to pretend to themselves that this massive wave of lawfare directed at Trump is anything other than a desperate attempt to keep him out of the oval office.

  5. Mark Dwyer

    A few details from the opinion:

    1. Eric’s sources told him an asset was worth $5.5 million. Eric valued it at $161 million instead.

    2. They added a phantom 9 floors to 40 Wall Street to gain $50 million in value. They added 1900 square feet to Trump’s “triplex,” making it almost three times its actual size, to gain between $114 and $207 million in value.

    3. They falsely denied the existence of pending litigation.

    4. They claimed 71 units in one property; there were 31.

    5. Trump wrangled a $26.6 million environmental tax benefit by agreeing that Mar-a-Lago could never be a private family dwelling. That and other covenants hugely reduced the property value. He then valued Mar-a-Lago by ignoring the tax agreements, adding hundreds of millions to the actual value.

    6. He valued apartments without noting that they were rent controlled, claiming up to 700% of the correct value for them.

    And I only skimmed the opinion. Millions more were fraudulently claimed. And the monitor says they are still not following the rules!

    I don’t understand real estate law, I’m sure. But I can’t see how no one lost money, if the lenders made loans setting interest payments that were fraudulently reduced by $168 million. Plus the disgorgement of a $126 million profit seems a sensible civil remedy for the sale of a building they could buy only because of fraud. And if this case truly is typical of how the real estate sector operates, we need a lot more enforcement of the fraud laws.

  6. Hal

    This just in. Trump has entered appeal, based on long standing practices (dating back to when New York was New Amsterdam, known as the golden age of real estate law, or at least back to when he owned a casino) and something about common law marriages (not clear on this part), he claims that only he is legally allowed to bankrupt a company that he founded and/ or bears his name.

    As IANAL, and know little of New Amsterdam (though at 20 I spent a couple of wonderful months in old Amsterdam) common law/ social conventions and practices, I won’t venture whether these grounds will prove sufficient.

    Scott, care to guess?

  7. rxc

    Why is this money going to the state of NY? They were not a party to the contracts between Trump and the bank. And what, exactly, were the “damages? How much, and who lost that? I thought that civil fraud was something that concerned parties in a contract, and the penalties were supposed to make the harmed party whole. But the bank did not say that it had been harmed in any way. If this is something that offends the state, then it sounds like it should have been a criminal fraud trial, with all the bells and whistles attached to criminal trials. But none of that happened here.

    This was nothing but a shakedown, with the added benefit of trying to keep Trump from moving back into the White House

  8. Steven

    Someone will pay that bond. We may or may not know who this person is. But Donald Trump will be very grateful and will likely return the favor somehow.

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